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Intermediate Accounting I

Intermediate Accounting I. Session 2 The Accounting Environment Tour of the Balance Sheet. Spring 2013 Professor Bill O’Brien. Financial Accounting Model. (useful & relevant). Company. Users. F/S. Financial Impact. Economic Decisions. Financial Information & Cost of Capital.

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Intermediate Accounting I

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  1. Intermediate Accounting I • Session 2 • The Accounting Environment • Tour of the Balance Sheet Spring 2013 Professor Bill O’Brien Intermediate Accounting I-Spring 2013

  2. Financial Accounting Model (useful & relevant) Company Users F/S Financial Impact Economic Decisions Intermediate Accounting I-Spring 2013

  3. Financial Information & Cost of Capital • More disclosure • More transparency • Less risk • Lower cost of capital Intermediate Accounting I-Spring 2013

  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-Spring 2013

  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-Spring 2013

  6. FASB Codification • Arranged by topic; see Graphic 1-5 • Primary source of U.S. GAAP • Other sources: rules and interpretations of the SEC Intermediate Accounting I-Spring 2013

  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-Spring 2013

  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-Spring 2013

  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-Spring 2013

  10. The Perfect Storm • IFRS Adoption: SEC • Convergence: FASB • Private Company GAAP: FAF • All companies will be affected Intermediate Accounting I-Spring 2013

  11. Why a Single Set of Standards • A level playing field • Common rules for a global economy • Consistent high quality standards • Efficiency and effectiveness • Improved understanding • Cost effective approach ADVANCED ACCOUNTING-2012 11

  12. History of Prior Attempts The problem: A worldwide Tower of Accounting Babel The solution?: The U.S. way or the highway Harmonization Convergence Adoption of IFRS ADVANCED ACCOUNTING-2012

  13. U.S. GAAP—the Only Way Before Enron and WorldCom: U.S. GAAP is the highest quality financial reporting in the world After Enron and WorldCom: Let’s talk ADVANCED ACCOUNTING-2012

  14. Harmonization A perceived win-win Countries keep their own standards Differences are minimized Close doesn’t count Inconsistencies remained Comparability problems continued ADVANCED ACCOUNTING-2012

  15. Convergence The best of the best Define “best” Local standards remain Pronouncements are jointly produced but separately issued Minor differences continue Define “minor” difference Currently, “in trouble” ADVANCED ACCOUNTING-2012

  16. 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-Spring 2013

  17. Recall this Concept: What Exactly is Convergence? • Global options • Single standard mentality-US GAAP • Harmonization: minimal differences • Convergence: best of the best • Stated goal: • Single set of high quality, understandable & enforceable global accounting standards • Transparency and comparability • Normal standard setting process • Different wording; different effectivity dates ADVANCED ACCOUNTING-2012

  18. Private Company GAAP • Blue Ribbon Panel recommendations • Rejected IFRS for SMEs • Carve out model • 3-5 year review • Either separate PCASB or PCSIC • FAF results on 5/22-23 • Opted for PCC-Private Company Council reporting to FASB • FASB will endorse but not approve PCC actions ADVANCED ACCOUNTING-2012

  19. NFP Accounting • Non-profit advisory committee • Changes in disclosure • Changes in language of MD&S • Mandatory metrics in footnotes • Project team meets 5/29 ADVANCED ACCOUNTING-2012

  20. IFRS Adoption Update SEC Feb. 24, 2010 Update: No early adoption 2011 final vote (Missed!) Periodic progress reports starting in 10/10 Substantial role for FASB post adoption Strong regulation and enforcement needed Envision 2015 as the commencement date ADVANCED ACCOUNTING-2012

  21. IFRS Adoption Update, continued Key Issues Noted: Development of sufficient and consistent standards Independent standard setter Investor, user and preparer education Impact on other non-reporting laws Impact on business issues ADVANCED ACCOUNTING-2012

  22. IFRS Adoption—Current Status 12/5/11…need a few more months 1/5/12…Shapiro: “blending”; “middle of a hurricane” 4/30/12…still waiting Endorsement model Commitment to incorporation Don’t expect anything until after the election Very political issue ADVANCED ACCOUNTING-2012

  23. Current Convergence Projects The Norwalk Agreement – 2002 FASB – IASB commitment to mutual development of standards On-going recommitments to conclusion 2006 and 2008 Conceptual Framework Project The foundation of financial accounting theory and financial statement format ADVANCED ACCOUNTING-2012

  24. 5 complete: Bus. combinations Consolidations Derecognition of liabilities Fair value OCI Future Plans: 2013: Revenue recognition Leases Fin. Instruments Insurance contracts Deferred: F/S presentation Post employment benefits Status of 11 Convergence Projects (as of 8/24) ADVANCED ACCOUNTING-2012

  25. “Draft” Exposure draft – July 1, 2010 Team reassigned On the backburner F/S Reformatting Update ADVANCED ACCOUNTING-2012

  26. Other Players; Prior Work-I • International Accounting Standards Committee (IASC) • Voluntary funding; part-time members • Non-binding standards-IAS • More focus on accommodation than rigors • Becomes IASB (Board) in 2001 • U.S. has strong influence; therefore, credibility • International Accounting Standards Board (IASB)-London • 12 F/T members; 2 P/T members (academics); now 15 • Funding via the IASC Foundation • Sets IFRS • International Financial Reporting Interpretations Committee (IFRIC)-interprets IFRS & provides guidance • Perhaps a similar role for FASB, post adoption? ADVANCED ACCOUNTING-2012

  27. Other Players; Prior Work-II • International Org. of Sec. Commissions (IOSCO) • Global org. of sec. regulators • Supported stronger IASC and single ww standard • European Union • Directives written into local law • 4th and 7th directives • Form and content • Consolidation • Adopted IFRS on 1/1/05 • International Federation of Accountants (IFAC) • Global auditing standards • AICPA is member of IFAC ADVANCED ACCOUNTING-2012

  28. 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-Spring 2013

  29. 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-Spring 2013

  30. 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-Spring 2013

  31. 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-Spring 2013

  32. SFACSchematic-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 value • Confirmatory value • Faithful Representation • Completeness • Neutrality • Free from material error • Enhancing • Comparability (including consistency) • Verifiability • Timeliness • Understandability • Constraints • Cost Effectiveness • Materiality • 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 • Monetary unit • Principles • Historical cost • Realization • Matching • Full disclosure 4 + 2 + (2 X 4) (2 X 3) + 2 + 3 Intermediate Accounting I - Fall 2011

  33. 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-Spring 2013

  34. 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-Spring 2013

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