Intermediate Accounting I

1. Intermediate Accounting I • Session 2 • The Accounting Environment • Tour of the Balance Sheet Fall2012 Professor Bill O’Brien Intermediate Accounting I-Fall 2012

2. Financial Accounting Model (useful & relevant) Company Users F/S Financial Impact Economic Decisions Intermediate Accounting I-Fall 2012

3. Financial Information & Cost of Capital • More disclosure • More transparency • Less risk • Lower cost of capital Intermediate Accounting I-Fall 2012

4. Cash v. Accrual • Cash • Receipts less disbursements • Accrual • Earned revenue less incurred expenses • Net income is a better predictor of future cash flows • Why is that? Intermediate Accounting I-Fall 2012

5. Current Considerations • On-going Politicization of Standards • Global Marketplace • Investor Confidence • Focus on Governance • The Sarbanes-Oxley Act of 2002 • Changes in the CPA Profession • The Perfect Storm Intermediate Accounting I-Fall 2012

6. FASB Codification • Arranged by topic; see Graphic 1-3 • Primary source of U.S. GAAP • Other sources: rules and interpretations of the SEC Intermediate Accounting I-Fall 2012

7. Standard Setting ProcessKey Players • SEC (Securities and Exchange Commission) • AICPA (Am. Institute of CPA’s) • FASB (Financial Acctg. Stds. Board) • IASB (Intl. Acctg. Stds. Board) • PCAOB (Pub. Co. Acctg. Oversight Board) • Issuers • Users • See Graphic 1-4 Intermediate Accounting I-Fall 2012

8. Gov’t SEC FASB Standard Setting Flow Chart A Political Circle -Creates SEC 1934 -Lobbies government -Delegates standard setting Pub. Cos. standards -Finances FASB indirectly Intermediate Accounting I-Fall 2012

9. Enforcement Flow Chart A Political Circle SEC -Created the PCAOB PCAOB -Lobbies government Finances PCAOB indirectly- -Oversees Reg. Indep. Accts. Reg. Ind. Accts. Pub. Cos. -Audits public companies Intermediate Accounting I-Fall 2012

10. International Convergence • International Accounting Standards Board (IASB) • IAS mandatory in European Union-1/1/05 • IASB-FASB Convergence Project • Completion target of 2011 • SEC IFRS Adoption Roadmap • IFRS in the U.S. by 2014 • Decision in 2011 • Do you think convergence of standards is good or bad for financial statement users? Intermediate Accounting I-Fall 2012

11. The Perfect Storm • IFRS Adoption: SEC • Convergence: FASB • Private Company GAAP: FAF • All companies will be affected Intermediate Accounting I-Fall 2012

12. Rules v. Principles • Major mindset change • IFRS-2,500 pages • FAS-25,000 pages • Thinking outside the box • Emphasizes the importance of the conceptual framework Intermediate Accounting I-Fall 2012

13. Investor Confidence Issues • Shaken by the events of a few. • Role of high quality financial reporting. • Corporate governance is not an option • What is. Is! • Audit committees have serious responsibilities Intermediate Accounting I-Fall 2012

14. Sarbanes-Oxley Act of 2002 • Major provisions • Creation of the Public Company Accounting Oversight Board (PCAOB) • Certification of financial statements by CEO and CFO • Limits on non-audit services • Audit partner rotation • Limits on hiring due to conflict of interests • Audit committees hire the external auditor • Section 404: internal control assessment Intermediate Accounting I-Fall 2012

15. Role of the Auditor • Uses GAAS to ascertain the existence of GAAP • GAAS: Generally accepted auditing standards • GAAP: Generally accepted accounting principles Intermediate Accounting I-Fall 2012

16. SFAC Schematic-I • SFAC 8: OBJECTIVES OF FINANCIAL REPORTING • Useful • Cash Flow Prediction • Economic Resource Information (1 X 3) • SFAC 2: QUALITATIVE CHARACTERISTICS • (Understandibility) • Primary • Relevance • Predictive • Feedback/historical • Timely • Reliability • Verifiable • Repr. Faithfulness (WYSIWYG) • Neutral • Secondary • Comparability • Consistency • Constraints • Cost/Benefit • Conservatism • Materiality--SAB 99 • SFAC 5: RECOGNITION & MEASUREMENTSFAC 7: CASH FLOWS & P,V. MEASUREMENT • Recognition • Definition • Measurability • Relevance • Reliability • Measurement • Unit • Method • Underlying Assumptions • Economic entity • Going concern • Periodicity • Stable monetary unit • Principles • Matching • Realization • Historical cost • Full disclosure 4 + 2 + (2 X 4) (2 X 3) + 2 + 3 Intermediate Accounting I-Fall 2012

17. SFAC Schematic-II • SFAC 6: ELEMENTS OF FINANCIAL STATEMENTS • Assets • Liabilities • Equity • Investments by owners • Distributions to owners • Comprehensive income • Revenue • Expenses • Gains • Losses 10 Intermediate Accounting I-Fall 2012

18. Evolution of Accounting Principles • Trend towards Asset/Liability model vs. Revenue/Expense model • Leads to pronouncements like: • SFAS 157: Defines fair value • SFAS 159: Establishes the “fair value option” • Which emphasizes Asset/Liability model Intermediate Accounting I-Fall 2012

19. The Balance Sheet • Book value does not equal market value • …but it does help determine market value • Major classifications Intermediate Accounting I-Fall 2012

20. Financial Position • Overview • Contents • Additional disclosure Intermediate Accounting I-Fall 2012

21. Balance Sheet Overview • Statement of financial position • B/S does not always portray FMV Intermediate Accounting I-Fall 2012

22. Balance Sheet Content • Tour of the balance sheet • Electronic Arts p. 114 • Consider Sepia Paint Co. p. 124 Intermediate Accounting I-Fall 2012