Intermediate Accounting September 30th, 2010

1. 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 Intermediate AccountingSeptember 30th, 2010

2. 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 Chapter 1 Learning Objectives

3. 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 Objectives of Financial Accounting 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. The Need for Accounting Rules: Why Do we Need Rules to Play the Game of Business? • 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). 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 • 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 http://www.aicpa.org/ 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 http://www.fasb.org/ 9

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

11. US Standard Setters 11

12. 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 FASB Due Process for Standard Setting 12

13. 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. 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 Supply and Demand of Financial Accounting Information 15

16. An effective process of capital allocation is critical to a healthy economy, which Accounting and Capital Allocation Review 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. 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! Sarbanes-Oxley Act (SOX) 17

18. 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 Who’s Who in the Regulatory Zoo? 18

19. 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 SEC IFRS Roadmap 19

20. International Standard Setters 20

21. 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 IASB Standard Setting 21

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

33. 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

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)?

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

36. 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 HOUSE OF GAAP 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. 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). Financial Reporting for Public Companies: The 10K 37

38. 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 Generally Accepted Accounting Principles (GAAP) 38