wiley - chapter 1: financial accounting and accounting standards
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DESCRIPTIONIntermediate Accounting, 13th Edition,Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
What is Financial Accounting?Language of Business:(1) the identification, measurement, and communication of financial information about(2) economic entities to (3) interested parties.
Accounting and Capital AllocationResources are limited. Efficient use of resources often determines whether a business thrives.
Financial ReportingInformation to help users with capital allocation decisions.
UsersPrimarily Investors & creditors (present and potential)
Capital AllocationThe process of determining how and at what cost money is allocated among competing interests.
Overall ObjectiveProvide decision useful information
1. ability to generate net cash inflowsa) Assess -Solvency, Liquidity, Profitability, & Risk
2. managements ability to protect andenhance the capital providers investmentsa) Assess the stewardship of Managers - ROA b) Control of Management-Determination of compensation awards
GAAP information limitsEconomic Entity Financial Information Financial StatementsBalance Sheet Income Statement Statement of Cash Flows Statement of Owners or Stockholders Equity Note Disclosures
Additional InformationPresidents letter Prospectuses, SEC Reporting News releases Forecasts Environmental Reports Etc.
Parties Involved in Standard SettingThree organizations:
Securities and Exchange Commission (SEC) American Institute of Certified Public Accountants (AICPA) Financial Accounting Standards Board (FASB)
1. Securities and Exchange CommissionEstablished by federal government
Accounting and reporting for public companies
Securities Act of 1933
Securities Act of 1934
Encouraged private standard-setting body SEC requires public companies to adhere to GAAP SEC Oversight Enforcement AuthorityChapter 1-6
2. American Institute of CPAsNational 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)
2. American Institute of CPAsAICPA and Accounting Standards Executive Committee AcSEC (established by AICPA) no longer issues authoritative accounting and audit guidance for public companies. Government oversight preferred following Sarbanes Oxley Act PCAOB oversees the development of auditing standards. AICPA continues to develop and grade the CPA examination and issue industry guides.
3. Financial Accounting Standards BoardWheat Committees recommendations resulted in the creation of the Financial Accounting Standards Board in 1973. Financial Accounting Foundation Financial Accounting Standards BoardFinancial Accounting Standards Advisory CouncilChapter 1-9
Selects members of the FASB Funds their activities Exercises general oversight. Mission to establish and improve standards of financial accounting and reporting.
Consult on major policy issues.
3. Financial Accounting Standards BoardMissions 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 Representationhttp://www.fasb.org/
Old House of GAAPAICPA Accounting Interpretations FASB Implementation Guides Category D (Least Authoritative) FASB Emerging Issues Task Force AICPA AcSEC Practice Bulletins Recognized Industry Practices
Category C FASB Technical Bulletins AICPA Industry Audit and Accounting Guides Category B FASB Statements, Interpretations, and Staff PositionsChapter 1-11
AICPA Statements of Position
CAP Accounting Research BulletinsLO 7
Category A (Most Authoritative)
New Codification for GAAP
Codification provides, in one place, all authoritative literature by topic
Generally Accepted Accounting PrinciplesFASB Codification
Goal in developing the Codification is to provide in one place all the authoritative literature related to a particular topic.
Creates one level of GAAP, which is considered authoritative.All other accounting literature is considered nonauthoritative. FASB has developed the Financial Accounting Standards Board Codification Research System (CRS). CRS is an online real-time database that provides easy access to the Codification.
Generally Accepted Accounting PrinciplesIllustration 1-5 FASB Codification Framework
Diversity in Practice iGAAP includes the standards, referred to as International Financial Reporting Standards (IFRS), developed by the IASB. Differences between U.S. GAAP and iGAAP exist because of different: user needs, political pressures, and perhaps time Norwalk Agreement convergence of standards iGAAP tends to be simpler and less stringent than U.S. GAAP.
SEC recently eliminated the need for foreign companies that trade shares in U.S. markets to reconcile IFRS accounting with U.S. GAAP.