Chapter 1-1

Financial Accounting and Financial Accounting and Accounting StandardsAccounting Standards

Financial Accounting and Financial Accounting and Accounting StandardsAccounting Standards

ChapteChapter r

11

Chapter 1-2

1.1. Identify the major financial statements and other means of Identify the major financial statements and other means of financial reporting.financial reporting.

2.2. Explain how accounting assists in the efficient use of scarce Explain how accounting assists in the efficient use of scarce resources.resources.

3.3. Describe some of the challenges facing accounting.Describe some of the challenges facing accounting.

4.4. List the objectives of financial reporting.List the objectives of financial reporting.

5.5. Explain the need for accounting standards.Explain the need for accounting standards.

6.6. Identify the major policy-setting bodies and their role in the Identify the major policy-setting bodies and their role in the standard-setting process.standard-setting process.

7.7. Explain the meaning of generally accepted accounting Explain the meaning of generally accepted accounting principles.principles.

8.8. Describe the impact of user groups on the standard-setting Describe the impact of user groups on the standard-setting process.process.

9.9. Understand issues related to ethics and financial accounting.Understand issues related to ethics and financial accounting.

Chapter 1 Learning ObjectivesChapter 1 Learning ObjectivesChapter 1 Learning ObjectivesChapter 1 Learning Objectives

Chapter 1-3

Accounting Standards and Financial ReportingAccounting Standards and Financial ReportingAccounting Standards and Financial ReportingAccounting Standards and Financial Reporting

Financial Statements Financial Statements

and Financial and Financial

ReportingReporting

Financial Statements Financial Statements

and Financial and Financial

ReportingReporting

Accounting and Accounting and Capital AllocationCapital Allocation

Challenges Challenges

ObjectivesObjectives

The Need to The Need to Develop StandardsDevelop Standards

Parties Involved in Parties Involved in

Standard SettingStandard Setting

Parties Involved in Parties Involved in

Standard SettingStandard Setting

Generally Accepted Generally Accepted

Accounting Accounting

PrinciplesPrinciples

Generally Accepted Generally Accepted

Accounting Accounting

PrinciplesPrinciples

Issues in Financial Issues in Financial

ReportingReporting

Issues in Financial Issues in Financial

ReportingReporting

Securities and Securities and Exchange Exchange Commission (SC)Commission (SC)

Malaysian Malaysian Accounting Standard Accounting Standard Board (MASB)Board (MASB)

Malaysian Institute of Malaysian Institute of Certified Public Certified Public Accountant (MICPA)Accountant (MICPA)

Changing Role of the Changing Role of the MICPAMICPA

Political EnvironmentPolitical Environment

The Expectations The Expectations GapGap

International International Accounting Accounting StandardsStandards

EthicsEthics

Chapter 1-4 LO 1 Identify the major financial statements and other means of financial LO 1 Identify the major financial statements and other means of financial

reportingreporting....

Characteristics of AccountingCharacteristics of AccountingCharacteristics of AccountingCharacteristics of Accounting

Essential characteristics of accounting are:

(1) the identification, measurement, and communication of financial information about

(2) economic entities to

(3)(3) interestedinterested partiesparties.

Chapter 1-5

Financial Information

Accounting?

Identifies

and

Measures

and

Communicat

es

Financial Information

Accounting?

Identifies

and

Measures

and

Communicat

es

Balance Sheet

Income Statement

Statement of Cash Flows

Statement of Owners’ or

Stockholders’ Equity

Note Disclosures

Balance Sheet

Income Statement

Statement of Cash Flows

Statement of Owners’ or

Stockholders’ Equity

Note Disclosures

President’s letter

Prospectuses,

SC Reporting

News releases

Forecasts

Environmental Reports

Etc.

President’s letter

Prospectuses,

SC Reporting

News releases

Forecasts

Environmental Reports

Etc.

GAAPGAAP Not GAAPNot GAAP

Financial StatementsFinancial Statements Additional InformationAdditional InformationEconomic EntityEconomic Entity

Characteristics of AccountingCharacteristics of AccountingCharacteristics of AccountingCharacteristics of Accounting

LO 1 Identify the major financial statements and other means of financial LO 1 Identify the major financial statements and other means of financial reportingreporting....

Chapter 1-6

Accounting and Capital AllocationAccounting and Capital AllocationAccounting and Capital AllocationAccounting and Capital Allocation

Resources are limited. Efficient use of resources often determines whether a business thrives.Resources are limited. Efficient use of resources often determines whether a business thrives.

Financial Financial

ReportingReporting

Financial Financial

ReportingReporting

Information to help Information to help

users with capital users with capital

allocation decisions.allocation decisions.

UsersUsersUsersUsers

Investors, creditors, Investors, creditors,

and other usersand other users

Capital AllocationCapital AllocationCapital AllocationCapital Allocation

The process of The process of

determining how and determining how and

at what cost money at what cost money

is allocated among is allocated among

competing interests.competing interests.

LO 2 Explain how accounting assists in the efficient use of scare LO 2 Explain how accounting assists in the efficient use of scare resources.resources.

Illustration 1-1Illustration 1-1 Capital Allocation Process

Chapter 1-7

Challenges Facing Financial Challenges Facing Financial AccountingAccounting

Challenges Facing Financial Challenges Facing Financial AccountingAccounting

Non-financial Measurements

Forward-looking Information

Soft Assets

Timeliness

LO 3 Describe some of the challenges facing accounting.LO 3 Describe some of the challenges facing accounting.

Chapter 1-8

Financial reporting should provide information: Financial reporting should provide information: Financial reporting should provide information: Financial reporting should provide information:

(a) that is useful to present and potential investors and (a) that is useful to present and potential investors and creditors and other users in making rational creditors and other users in making rational investment, credit, and similar decisions. investment, credit, and similar decisions.

(a) that is useful to present and potential investors and (a) that is useful to present and potential investors and creditors and other users in making rational creditors and other users in making rational investment, credit, and similar decisions. investment, credit, and similar decisions.

(b) to help present and potential investors and creditors (b) to help present and potential investors and creditors and other users in assessing the amounts, timing, and and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. uncertainty of prospective cash receipts.

(b) to help present and potential investors and creditors (b) to help present and potential investors and creditors and other users in assessing the amounts, timing, and and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. uncertainty of prospective cash receipts.

(c) about the economic resources of an enterprise, the (c) about the economic resources of an enterprise, the claims to those resources, and the effects of claims to those resources, and the effects of transactions, events, and circumstances that change transactions, events, and circumstances that change its resources and claims to those resources. its resources and claims to those resources.

(c) about the economic resources of an enterprise, the (c) about the economic resources of an enterprise, the claims to those resources, and the effects of claims to those resources, and the effects of transactions, events, and circumstances that change transactions, events, and circumstances that change its resources and claims to those resources. its resources and claims to those resources.

Objectives of Financial AccountingObjectives of Financial AccountingObjectives of Financial AccountingObjectives of Financial Accounting

LO 4 List the objectives of financial reporting.LO 4 List the objectives of financial reporting.

Chapter 1-9

Need to Develop StandardsNeed to Develop StandardsNeed to Develop StandardsNeed to Develop Standards

Various users need financial information

Various users need financial information

The accounting profession has attempted to develop a set of standards that are

generally accepted and universally practiced.

Financial StatementsBalance SheetIncome StatementStatement of Stockholders’ EquityStatement of Cash FlowsNote Disclosure

Financial StatementsBalance SheetIncome StatementStatement of Stockholders’ EquityStatement of Cash FlowsNote Disclosure

Generally Generally Accepted Accepted

Accounting Accounting Principles (GAAP)Principles (GAAP)

Generally Generally Accepted Accepted

Accounting Accounting Principles (GAAP)Principles (GAAP)

LO 5 Explain the need for accounting standards.LO 5 Explain the need for accounting standards.

Chapter 1-10

Malaysian Financial Reporting PracticesHistorical perspective- Companies Ordinances (and amendments) of 1940, 1946 and 1956 ~ regulates financial reporting.

- Companies Act (1965) ~ reporting requirements, rules & regulations on accounting were formally established.

- Ninth Schedule ~ disclosure requirements

- Malaysian Association of Certified Public Accountants (MACPA) – 1958 ~ regulates the practices of its members who carry the title of certified public accountants.

- 1967 ~ Malaysian Institute of Accountants (MIA) was established ~ its regulations cover the practices of the whole accounting profession in Malaysia.

-

Chapter 1-11

- 1978- MACPA became member of the International Accounting Standards Committee (IASC) ~ adopts the International Accounting Standards until 1997. -1984 ~ first Malaysian Accounting Standard (MAS 1) on “Earnings Per Share” was issued.

- 1987 ~ MIA began to issue standards

- The process of adopting the IASs and MASs continued until 1997 when the Malaysian Accounting Standards Board (MASB) was established.

Chapter 1-12

Financial reporting regime in MalaysiaFinancial reporting regime in Malaysia

Key players in the Financial Reporting Process

Financial reporting regime in MalaysiaFinancial reporting regime in Malaysia

Key players in the Financial Reporting Process

(1)(1) Accountant General’s OfficeAccountant General’s Office

Manages the nation’s accounting and financial aspects Manages the nation’s accounting and financial aspects Functions:Functions:

Managing the human resources and career Managing the human resources and career development for the accounting services in public development for the accounting services in public sector,sector,

Establishing accounting standards for the public sector,Establishing accounting standards for the public sector, Providing consultancy services on accounting and Providing consultancy services on accounting and

financial matters to public sector,financial matters to public sector, Preparing monthly accounting financial information,Preparing monthly accounting financial information, Accounting for payments and receipts on a daily basis,Accounting for payments and receipts on a daily basis, Preparing Annual Public Accounts.Preparing Annual Public Accounts.

Chapter 1-13

(2) (2) Malaysian Institute of Accountants (MIA)Malaysian Institute of Accountants (MIA)

Sets professional requirements for Sets professional requirements for accountants, conduct research and accountants, conduct research and published materials on many different published materials on many different subjects related to accounting, auditing, subjects related to accounting, auditing, attestation and assurance services, attestation and assurance services, management consulting services and taxes. management consulting services and taxes.

Chapter 1-14

(3) (3) Auditor’s General departmentAuditor’s General department

Ensures that the accounting and reporting Ensures that the accounting and reporting standards prescribed by the Accountant standards prescribed by the Accountant General’s Office are complied with by the General’s Office are complied with by the public sector.public sector.

Chapter 1-15

(4) (4) The Companies Commission of Malaysia (CCM)The Companies Commission of Malaysia (CCM)

Functions:Functions: Ensure that the provisions of the following Acts and laws are Ensure that the provisions of the following Acts and laws are

administered, enforced, carried out and complied with:administered, enforced, carried out and complied with:Companies Act 1965 Companies Act 1965 Trust Companies Act 1949Trust Companies Act 1949Registration of Business Act 1956Registration of Business Act 1956Any subsidiary legislation made under the Acts specified Any subsidiary legislation made under the Acts specified

above.above.

Enhance and promote the supply of business and corporate Enhance and promote the supply of business and corporate informationinformation

Chapter 1-16

Acting as agent of the Government and providing Acting as agent of the Government and providing services in collecting and enforcing payment of services in collecting and enforcing payment of prescribed feesprescribed fees

Regulating matters relating to corporations, Regulating matters relating to corporations, companies and businessescompanies and businesses

Encourage and promote proper conduct amongst Encourage and promote proper conduct amongst director, secretaries and other officers of a director, secretaries and other officers of a corporationcorporation

Chapter 1-17

(5) (5) Central Bank (Bank Negara Malaysia)Central Bank (Bank Negara Malaysia)

Promoting economic growth, a high level of Promoting economic growth, a high level of employment, maintaining price stability and employment, maintaining price stability and a reasonable balance in the country’s a reasonable balance in the country’s international payments position, eradicating international payments position, eradicating poverty and restructuring society.poverty and restructuring society.

Chapter 1-18

(6) (6) Securities Commission (SC)Securities Commission (SC)

Function: Function: regulate all matters relating to the securities regulate all matters relating to the securities

industry.industry. Emphasise on high standards of disclosure Emphasise on high standards of disclosure

and accounting standards by companies.and accounting standards by companies.

Chapter 1-19

(7)(7) Malaysian Accounting Standard Board (MASB) Malaysian Accounting Standard Board (MASB)

Financial Reporting Foundation (FRF) and MASB were Financial Reporting Foundation (FRF) and MASB were established under the Financial Reporting Act 1997established under the Financial Reporting Act 1997

FRF’s functions:FRF’s functions: to provide views to MASB concerning the issuance, to provide views to MASB concerning the issuance,

review or review or development of accounting standards.development of accounting standards. To review the performance of the MASBTo review the performance of the MASB responsible for the financing arrangements of the responsible for the financing arrangements of the

MASBMASB to perform other functions as prescribed by the to perform other functions as prescribed by the

Minister of FinanceMinister of Finance

Chapter 1-20

MASB’s functions:MASB’s functions: to issue new accounting standardsto issue new accounting standards to review, revise or adopt existing accounting to review, revise or adopt existing accounting

standardsstandards to issue statements of principles for financial to issue statements of principles for financial

reportingreporting to sponsor or undertake development of possible to sponsor or undertake development of possible

accounting standardsaccounting standards to conduct public consultationto conduct public consultation To develop a conceptual framework for the purpose To develop a conceptual framework for the purpose

of evaluatingof evaluating proposed accounting standardsproposed accounting standards To make changes to the form and content of To make changes to the form and content of

proposed accounting standardsproposed accounting standards- to perform other functions as prescribed by the - to perform other functions as prescribed by the

Minister of FinanceMinister of Finance

Chapter 1-21

(8) (8) The corporations – directors and The corporations – directors and managementmanagement

Directors’ are responsible to ensure that the Directors’ are responsible to ensure that the accounts are in compliance to the approved accounts are in compliance to the approved accounting standards (Sec 166A(A))accounting standards (Sec 166A(A))

Chapter 1-22

(9) (9) Public Accounting FirmsPublic Accounting Firms

Perform many different services related to Perform many different services related to accounting, auditing, attestation and accounting, auditing, attestation and assurance services, management consulting assurance services, management consulting services and taxes.services and taxes.

Chapter 1-23

Statutory regulation on Financial Accounting and Reporting

(1) Financial Reporting Act 1997-Deals with compliance with approved accounting standards

(2) Companies Act 1965-Requires every companies to keep proper accounting and other records to sufficiently explain the transactions and the financial position of the company and to enable true and fair view of the accounts.-Must comply with the act Ninth Schedule concerning disclosure requirements.

Chapter 1-24

(3) Income Tax Act 1967- Significant to financial accounting and reporting because taxation is considered as business expense that must be reported in the income statement.

(4) Guidelines of the Securities Commission (SC) 1995- In 1995 issued “Policies and guidelines on Issue/Offer of securities”

(i) Corporate disclosure policy - Requires public company to maintain high standards of disclosure. - public listed companies (plc) must immediately release information which are expected to have material effect on market activity.

Chapter 1-25

(ii) Post-listing obligations - Requires plc to submit:

* Annual report within 14 days from the date of the annual general meeting * Interim and periodic report to SC immediately figures are available * related party transactions must be disclosed in the annual report

(iii) Accounting standards and valuation / revaluation of assets * public companies must comply with approved accounting standards and GAAP * accountants’ reports must be prepared by qualified accountants * the information disclosed must be in accordance with the practices at least those required under the Companies Act 1965 and the approved accounting standards

Chapter 1-26

(5) KLSE Listing requirements-Areas of financial accounting and reporting:

(i) Submission of reports* annual audited report

~ must be issued to the shareholders within a period not exceeding 6 months from the close of the financial year

~ must be submitted to the Exchange within a period not exceeding 4 months from the close of the financial year

~ must be in the form of consolidated financial statements

~ should be prepared in accordance to MASB and the Ninth Schedule

Chapter 1-27

* Interim reporting - must comply with the Quarterly Reporting requirement.

~ submit to the Exchange a quarterly report (Balance sheet, income statement and explanatory notes) in consolidated form not later than 2 months after the end of each quarter of the financial year.

~ the balance sheet must be as at the end of the current quarter and a comparative balance sheet as of the end of the immediately preceding financial year; income statement must cover the current quarter and cumulative for the current financial year to date and comparative income statement for the comparable quarter (current and year to date) of the immediately preceding financial year.

Chapter 1-28

(ii) Additional disclosure * particulars of material contracts involving directors’ interest * a statement setting out:

~ names of substantial shareholders and their interest~ number of holders of each class of equity security

and its voting rights~ a distribution schedule of each class of equity

security setting out the number of holders and percentage in the categories of less than 500.

~ the percentage of the total holding of the 20 largest holders of each class of equity security.

~ the names of the 20 largest holders of each class of equity security and the number of equity security of each class held. * Properties held (address, description, exiting use, tenure, terms of lease etc.)

Chapter 1-29

(6) Bank Negara Malaysia (BNM) - Guidelines on financial reporting practices of financial institutions are:

(i) BNM/GP 3 – streamlines the method of income recognition and loan loss provision. Main provisions:

* where a loan is classified as non-performing loan, interest accrued should be suspended and credited to interest-in-suspense account;

* build up and maintain a general provision for bad debts and doubtful debts of at least 1% of total outstanding loans, net of interest-in-suspense and specific provision for bad debts and doubtful debts; and

* a specific provision is required for doubtful or bad loan account where there is a shortfall in security value over the amount of loan outstanding.

Chapter 1-30

(ii) BNM /GP8 - standardise the format of financial reports for banks and financial institutions. - 3 specimen accounts: Model Bank Berhad, Model Merchant Bank Berhad and Model Finance Company Berhad have been prepared as guidance for standard practices on the basis of the following criteria:

* Classification of assets and liabilities;* liquidity pf assets and liabilities;* maturity analysis of assets and liabilities; and* concentration of assets and liabilities.

Chapter 1-31

Accounting standards pronouncements in MalaysiaAccounting standards pronouncements in MalaysiaAccounting standards pronouncements in MalaysiaAccounting standards pronouncements in Malaysia

Pronouncements before the new financial reporting regimePronouncements before the new financial reporting regime

Before the establishment of the MASB; the MIA and Before the establishment of the MASB; the MIA and MACPA regulate the financial accounting and reporting MACPA regulate the financial accounting and reporting in Malaysia.in Malaysia.

Both bodies do not have power to enforce compliance by Both bodies do not have power to enforce compliance by companies.companies.

To ensure wider acceptance, the compliance were To ensure wider acceptance, the compliance were professionally mandatory to members.professionally mandatory to members.

Chapter 1-32

The standards were comprises of :The standards were comprises of : International Accounting StandardsInternational Accounting Standards Malaysian Accounting StandardsMalaysian Accounting Standards

Also issued technical bulletins and other Also issued technical bulletins and other pronouncements that formed part of the pronouncements that formed part of the generally accepted accounting practices of generally accepted accounting practices of Malaysia. Malaysia.

Chapter 1-33

To ensure the widest compliance MIA and MACPA To ensure the widest compliance MIA and MACPA through their respective Financial Statements Review through their respective Financial Statements Review Committee conduct a regular reviews of financial Committee conduct a regular reviews of financial statements prepared and audited by their members.statements prepared and audited by their members.

These 2 bodies stop issuing the accounting standards These 2 bodies stop issuing the accounting standards when the Financial Reporting Act was gazetted in when the Financial Reporting Act was gazetted in 1997, signaling the shift of the Malaysian accounting 1997, signaling the shift of the Malaysian accounting standard setting process from private sector accounting standard setting process from private sector accounting bodies to the public sector statutory body. bodies to the public sector statutory body.

Chapter 1-34

Pronouncements under the New Financial Reporting RegimePronouncements under the New Financial Reporting RegimePronouncements under the New Financial Reporting RegimePronouncements under the New Financial Reporting Regime

Due process of the MASBDue process of the MASB

Is a process by which the Board develops or adopts and Is a process by which the Board develops or adopts and issues accounting standards.issues accounting standards.

The accounting standards issued by the Board are The accounting standards issued by the Board are designated as MASB standards.designated as MASB standards.

The Board pursues a policy of harmonisation of MASB The Board pursues a policy of harmonisation of MASB standards so as to be compatible with the standards of standards so as to be compatible with the standards of international and other national standard setters. international and other national standard setters.

Chapter 1-35

In September 1998, the Board adopted 24 of the In September 1998, the Board adopted 24 of the extant IASs and MASs issued by the MIA and extant IASs and MASs issued by the MIA and MACPA, thus given these standards the status of MACPA, thus given these standards the status of approved accounting standards.approved accounting standards.

This status will continue to apply until each of the This status will continue to apply until each of the standards is amended, rescinded or superseded by standards is amended, rescinded or superseded by a new MASB standard.a new MASB standard.

The Board has commenced a project to adopt or The Board has commenced a project to adopt or adapt the extant of IASc and MASs; and developing adapt the extant of IASc and MASs; and developing new accounting standards.new accounting standards.

Chapter 1-36

MASB also issued technical pronouncements which MASB also issued technical pronouncements which includes Statements of Principles (SOP), Urgent Issues includes Statements of Principles (SOP), Urgent Issues Abstract (UIA), Technical Releases (TR) and Guidance Abstract (UIA), Technical Releases (TR) and Guidance Notes (GN).Notes (GN).

Purpose of technical pronouncements: to provide Purpose of technical pronouncements: to provide guidance on the application of GAAP to the resolution of guidance on the application of GAAP to the resolution of a particular accounting issue.a particular accounting issue.

Chapter 1-37

Due process in the issuance of MASB standardsDue process in the issuance of MASB standardsDue process in the issuance of MASB standardsDue process in the issuance of MASB standards

Stage 1:Stage 1: Identify topics for MASB standards either fromIdentify topics for MASB standards either from its own research, external sources or from its own research, external sources or from

submission by regulatory authorities and other submission by regulatory authorities and other interested parties.interested parties.

Stage 2:Stage 2: Undertake investigation which involves Undertake investigation which involves consultation and consideration of the relevant consultation and consideration of the relevant conceptual issues, any pre-existing conceptual issues, any pre-existing pronouncements and practices both in pronouncements and practices both in Malaysia and overseas, and the economic, Malaysia and overseas, and the economic, legal and practical implications of the legal and practical implications of the introduction of particular accounting introduction of particular accounting requirements.requirements.

Chapter 1-38

Stage 3:Stage 3: When the relevant issues have been When the relevant issues have been identified, a working group identified, a working group is appointed by is appointed by the MASB to the MASB to debate the issue.debate the issue.

Stage 4:Stage 4: A draft document is prepared in the form of A draft document is prepared in the form of either Draft Statement of Principles (DSOP) either Draft Statement of Principles (DSOP) or an Exposure Draft (ED). This is presented or an Exposure Draft (ED). This is presented to the MASB for review and next presented to to the MASB for review and next presented to the FRF for comments.the FRF for comments.

Stage 5:Stage 5: When the issues involved require more When the issues involved require more discussions and deliberations, a Discussion discussions and deliberations, a Discussion Paper Paper (DP) may be issued.(DP) may be issued.

Chapter 1-39

Stage 6:Stage 6: The draft pronouncement is then The draft pronouncement is then published to allow an opportunity for published to allow an opportunity for

interested parties to comment on interested parties to comment on the the proposal and for the MASB to proposal and for the MASB to gauge the gauge the appropriateness and level of appropriateness and level of

acceptance of those acceptance of those proposals.proposals.

Stage 7:Stage 7: An exposure draft may be amended in An exposure draft may be amended in the light of feedback resulting from the the light of feedback resulting from the

exposure period. exposure period.

Chapter 1-40

Role of the profession in accounting standard settingRole of the profession in accounting standard settingRole of the profession in accounting standard settingRole of the profession in accounting standard setting

The profession plays a significant role in the standard The profession plays a significant role in the standard setting by being involved in the activities of the MASB.setting by being involved in the activities of the MASB.

MIA and other professional accountancy bodies provide MIA and other professional accountancy bodies provide input to the MASB.input to the MASB.

The professional bodies and MIA continues to educate The professional bodies and MIA continues to educate members by providing interpretations and guidance on members by providing interpretations and guidance on the standards issued by the Board.the standards issued by the Board.

Chapter 1-41

Generally Accepted Accounting Generally Accepted Accounting PrinciplesPrinciples

Generally Accepted Accounting Generally Accepted Accounting PrinciplesPrinciples

Those principles that have substantial authoritative support.

LO 7 Explain the meaning of generally accepted accounting LO 7 Explain the meaning of generally accepted accounting principles.principles.

Chapter 1-42

Issues in Financial ReportingIssues in Financial ReportingIssues in Financial ReportingIssues in Financial Reporting

Standard Setting in a Political EnvironmentAccounting standards are as much a product of political action as they are of careful logic or empirical findings.

LO 8 Describe the impact of user groups on the standard-setting LO 8 Describe the impact of user groups on the standard-setting process. process.

Chapter 1-43

MASBMASBMASBMASB Preparers Preparers

Financial Community

Financial Community

Government (SC, IRS, other agencies)

Government (SC, IRS, other agencies)

Industry Associations

Industry Associations

Business EntitiesBusiness Entities

CAs andAccounting Firms

CAs andAccounting Firms

MICPA )MICPA )

AcademiciansAcademicians

Investing PublicInvesting Public

Accounting standardsAccounting standards

Standard Setting

Standard Setting

LO 8 Describe the impact of user groups on the standard-setting LO 8 Describe the impact of user groups on the standard-setting process. process.

Illustration 1-5Illustration 1-5 User Groups that Influence Accounting Standards

Chapter 1-44

Issues in Financial ReportingIssues in Financial ReportingIssues in Financial ReportingIssues in Financial Reporting

Expectation Gap

What the public thinks accountants should do vs. what accountants think they can do.

Difficult to close

Sarbanes-Oxley Act (2002)

Public Company Accounting Oversight Board (PCAOB)

LO 8 Describe the impact of user groups on the standard-setting LO 8 Describe the impact of user groups on the standard-setting process. process.

Chapter 1-45

Issues in Financial ReportingIssues in Financial ReportingIssues in Financial ReportingIssues 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

LO 9 Understand issues related to ethics and financial LO 9 Understand issues related to ethics and financial accounting. accounting.