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Topic II Contemporary Issues

Topic II Contemporary Issues. Shift gears Theory approach to GAAP Cases Start with important and changing area…. Chapter 9 Income. Understand the nature of income. Distinguish between matching and asset-liability approaches Recognize comprehensive income.

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Topic II Contemporary Issues

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  1. Topic II Contemporary Issues • Shift gears • Theory approach to GAAP • Cases • Start with important and changing area…..

  2. Chapter 9 Income • Understand the nature of income. • Distinguish between matching and asset-liability approaches • Recognize comprehensive income. • Understand the problems in revenue recognition.

  3. Income Concepts • Start with…the phenomenon.. What is it? • Basic Nature • Survey says…

  4. Income Concepts • Past Definitions • A. Smith (Wealth of Nations, 1776) • JR Hicks (Value and Capital, 1939) • Hard to apply….

  5. Jeff and Jon • Example • Case

  6. Philips Range • Range of Concepts • Psychic • Economic PV • Accretion • Accrual • Cash • Objectivity vs conceptual reasonableness.

  7. Importance of Income • Role and Relevance • central core • basis for tax • guide to capital allocation • prudent conduct • Etc.

  8. Two Approaches • Accounting Income Approaches • Matching • Asset-Liability

  9. Matching Approach • Traditional Matching • Revenues and Expenses • Venture basis • “Gospel of Matching” • Pros and cons

  10. Asset-Liability Approaches • Earnings result as a consequence of changes in assets and liabilities. • New view • Exhibit 9.1 • Pros and cons

  11. Comprehensive Income • Comprehensive Income: SFAC # 6 (1985). • SFAS #130 (1997) Reporting Comprehensive Income Exhibit 9.2

  12. Revenue Recognition • Revenues earned continuously; recognized when major effort & realization • So we measure continuous data discretely? • Four models: • During production • End of production • Time of sale • Collect cash • Revenue Controversy-hot topic

  13. Revenue Recognition • Dot.com revenue recognition problems

  14. Income/Accounting Change • Elliott et al* • IT changing everything..

  15. Elliott et al • 3 Waves • 1. Agriculture: -8000 to +1600 • 2. Industrial: 1600 to 1955 • 3. Information: 1955-now

  16. Elliott et al • Broken Model

  17. Concerns & Update • SEC Concerns • L. Turner quote • FASB revenue project • Solomons 25 year perspective: no change!

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