Kế toán, kiểm toán - Financial accounting and accounting standards

PREVIEW OF CHAPTER 1Intermediate Accounting16th EditionKieso ● Weygandt ● Warfield Understand the financial reporting environment. Identify the major policy-setting bodies and their role in the standard-setting process.LEARNING OBJECTIVESExplain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. Describe major challenges in the financial reporting environment.After studying this chapter, you should be able to:Financial Accounting and Accounting Standards1LO 1FINANCIAL REPORTING ENVIRONMENTEssential characteristics of accounting are:the identification, measurement, and communication of financial information about economic entities to interested parties. LO 1Financial InformationAccounting?Identifiesand Measuresand CommunicatesBalance SheetIncome StatementStatement of Cash FlowsStatement of Owners’ or Stockholders’ EquityNote DisclosuresPresident’s letter ProspectusesReports filed with governmental agenciesNews releasesForecasts Environmental impact statements Etc.GAAPFinancial StatementsAdditional InformationEconomic EntityFINANCIAL REPORTING ENVIRONMENTLO 1What is the purpose of information presented in notes to the financial statements?a. To provide disclosure required by generally accepted accounting principles.b. To correct improper presentation in the financial statements. c. To provide recognition of amounts not included in the totals of the financial statements.d. To present management’s responses to auditor comments.QuestionLO 1FINANCIAL REPORTING ENVIRONMENTResources are limited. Efficient use of resources often determines whether a business thrives.ILLUSTRATION 1-1 Capital Allocation ProcessAccounting and Capital AllocationFINANCIAL REPORTING ENVIRONMENTLO 1An effective process of capital allocation is critical to a healthy economy, whicha. promotes productivity.b. encourages innovation. c. provides an efficient and liquid market for buying and selling securities.d. All of the above.Accounting and Capital AllocationQuestionLO 1“It’s the accounting.” That’s what many investors seem to be saying these days. Even the slightest hint of any accounting irregularity at a company leads to a subsequent pounding of the company’s stock price. For example, the Wall Street Journal has run the following headlines related to accounting and its effects on the economy:Stocks take a beating as accounting woes spread beyond Enron. Quarterly reports from IBM and Goldman Sachs sent stocks tumbling.VeriFone finds accounting issues; stock price cut in half.Bank of America admits hiding debt.Facebook, Zynga, Groupon: IPO drops due to accounting, not valuation. It now has become clear that investors must trust the accounting numbers, or they will abandon the market and put their resources elsewhere. With investor uncertainty, the cost of capital increases for companies who need additional resources. In short, relevant and reliable financial information is necessary for markets to be efficient. WHAT DO THE NUMBERS MEAN? IT’S THE ACCOUNTINGLO 1Provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers.Objectives of Financial ReportingFINANCIAL REPORTING ENVIRONMENTLO 1Equity Investors and CreditorsObjective of Financial AccountingGeneral-Purpose Financial StatementsProvide financial reporting information to a wide variety of users. Provide the most useful information possible at the least cost.Investors are the primary user group.LO 1Decision-UsefulnessInvestors are interested in assessing the company’s ability to generate net cash inflows and management’s ability to protect and enhance the capital providers’ investments.Entity PerspectiveCompanies viewed as separate and distinct from their owners.Objective of Financial AccountingLO 1In addition to providing decision-useful information about future cash flows, management also is accountable to investors for the custody and safekeeping of the company’s economic resources and for their efficient and profitable use. For example, the management of The Hershey Company has the responsibility for protecting its economic resources from unfavorable effects of economic factors, such as price changes, and technological and social changes. Because Hershey’s performance in discharging its responsibilities (referred to as its stewardship responsibilities) usually affects its ability to generate net cash inflows, financial reporting may also provide decision-useful information to assess management performance in this role.Source: Chapter 1, “The Objective of General Purpose Financial Reporting,” and Chapter 3, “Qualitative Characteristics of Useful Financial Information,” Statement of Financial Accounting Concepts No. 8 (Norwalk, Conn.: FASB, September 2010), paras. OB4–OB10.WHAT DO THE NUMBERS MEAN? DON’T FORGET STEWARDSHIPLO 1Various users need financial informationThe accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.Financial StatementsBalance SheetIncome StatementStatement of Stockholders’ EquityStatement of Cash FlowsNote DisclosureGenerally Accepted Accounting Principles (GAAP)The Need To Develop StandardsLO 1Understand the financial reporting environment. Identify the major policy-setting bodies and their role in the standard-setting process.LEARNING OBJECTIVESExplain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. Describe major challenges in the financial reporting environment.After studying this chapter, you should be able to:Financial Accounting and Accounting Standards1LO 2PARTIES INVOLVED IN STANDARD SETTINGThree organizations:Securities and Exchange Commission (SEC).American Institute of Certified Public Accountants (AICPA).Financial Accounting Standards Board (FASB).LO 2Securities Act of 1933Securities Act of 1934Established by federal government.Accounting and reporting for public companies.Encouraged private standard-setting body.SEC requires public companies to adhere to GAAP.SEC Oversight.Enforcement Authority.Securities and Exchange Commission (SEC) Involved In Standard SettingLO 2Committee on Accounting ProceduresAccounting Principles Board1939 to 1959Issued 51 Accounting Research Bulletins (ARBs)Problem-by-problem approach failed1959 to 1973Issued 31 Accounting Principle Board Opinions (APBOs)Wheat Committee recommendations adopted in 1973 Institute of CPAs (AICPA)National professional organizationEstablished the following:Parties Involved In Standard SettingLO 2Wheat Committee’s recommendations resulted in creation of FASB.Financial Accounting FoundationSelects members of the FASB. Funds their activities. Exercises general oversight.Financial Accounting Standards BoardFinancial Accounting Standards Advisory CouncilMission to establish and improve standards of financial accounting and reporting.Consult on major policy issues.Financial Accounting Standards Board (FASB)Parties Involved In Standard SettingLO 2Missions is to establish and improve standards of financial accounting and reporting. Differences between FASB and APB include:Financial Accounting Standards BoardSmaller Membership.Full-time, Remunerated Membership.Greater Autonomy.Increased Independence.Broader Representation. 2The first step taken in the establishment of a typical FASB statement is a. The board conducts research and analysis and a discussion memorandum is issued.b. A public hearing on the proposed standard is held.c. The board evaluates the research and public response and issues an exposure draft.d. Topics are identified and placed on the board’s agenda.Financial Accounting Standards BoardQuestionLO 2ILLUSTRATION 1-3The Due Process System of the FASBFinancial Accounting Standards BoardLO 2Types of PronouncementsAccounting Standards Updates.Financial Accounting Concepts.Financial Accounting Standards BoardLO 2Understand the financial reporting environment. Identify the major policy-setting bodies and their role in the standard-setting process.LEARNING OBJECTIVESExplain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. Describe major challenges in the financial reporting environment.After studying this chapter, you should be able to:Financial Accounting and Accounting Standards1LO 3Principles that have substantial authoritative support. Major sources of GAAP:FASB Standards, Interpretations, and Staff Positions.APB Opinions.AICPA Accounting Research Bulletins.GENERALLY ACCEPTED ACCOUNTING PRINCIPLESLO 3Should the accounting profession have principles-based standards or rules-based standards? Critics of the profession today say that over the past three decades, standard-setters have moved away from broad accounting principles aimed at ensuring that companies’ financial statements are fairly presented. Instead, these critics say, standard-setters have moved toward drafting voluminous rules that, if technically followed in “check-box” fashion, may shield auditors and companies from legal liability. That has resulted in companies creating complex capital structures that comply with GAAP but hide billions of dollars of debt and other obligations. To add fuel to the fi re, the chief accountant of the enforcement division of the SEC noted, “One can violate SEC laws and still comply with GAAP.”In short, what he is saying is that it is not enough just to check the boxes. This point was reinforced by the chief accountant of the SEC, who remarked that judgments should result in “accounting that refl ects the substance of the transaction, as well as being in accordance with the literature.” That is, you have to exercise judgment in applying GAAP to achieve high-quality reporting.Sources: Adapted from S. Liesman, “SEC Accounting Cop’s Warning: Playing by the Rules May Not Head Off Fraud Issues,” Wall Street Journal (February 12, 2002), p. C7. WHAT DO THE NUMBERS MEAN? YOU HAVE TO STEP BACKLO 3Goal 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 non-authoritative.FASB CodificationFASB has developed the Financial Accounting Standards Board Codification Research System (CRS). The FASB’s primary goal in developing the Codification is to provide in one place all the authoritative literature related to a particular topic.Generally Accepted Accounting PrinciplesLO 3ILLUSTRATION 1-4FASB Codification FrameworkGenerally Accepted Accounting PrinciplesLO 3Understand the financial reporting environment. Identify the major policy-setting bodies and their role in the standard-setting process.LEARNING OBJECTIVESExplain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP. Describe major challenges in the financial reporting environment.After studying this chapter, you should be able to:Financial Accounting and Accounting Standards1LO 4MAJOR CHALLENGES IN FINANCIAL REPORTINGGAAP is as much a product of political action as it is of careful logic or empirical findings. GAAP in a Political EnvironmentILLUSTRATION 1-5User Groups that Influence the Formulation of Accounting StandardsLO 4No recent accounting issue better illustrates the economic consequences of accounting than the current debate over the use of fair value accounting for financial assets. Both the FASB and the International Accounting Standards Board (IASB) have standards requiring the use of fair value accounting for financial assets, such as investments and other financial instruments. Fair value provides the most relevant and reliable information for investors about these assets and liabilities. However, in the wake of the recent credit crisis, some countries, their central banks, and bank regulators want to suspend fair value accounting, based on concerns that use of fair value accounting, which calls for recording significant losses on poorly performing loans and investments, could scare investors and depositors and lead to a “run on the bank.” For example, in 2009, Congress ordered the FASB to change its accounting rules so as to reduce the losses banks reported, as the values of their securities had crumbled. These changes were generally supported by banks. But these changes produced a strong reaction from some investors, with one investor group complaining that the changes would “effectively gut the transparent application of fair value measurement.” The group also says suspending fair value accounting would delay the recovery of the banking system. Such political pressure on accounting standard-setters is not confined to the United States. For example, French President Nicolas Sarkozy urged his European Union counterparts toEVOLVING ISSUES FAIR VALUE, FAIR CONSEQUENCES continuedLO 4back changes to accounting rules and give banks and insurers some breathing space amid the market turmoil. And more recently, international finance ministers are urging the FASB and IASB to accelerate their work on accounting standards, including the fair value guidance for financial instruments. Most recently, IASB chair Hans Hoogervorst indicated that work remains to be done in the fair value debate and that “the dichotomy between historical cost and fair value is not as stark as one would expect.” Mr. Hoogervorst noted that while historical cost is to some extent based on fair value, it needs a degree of current measurement to maintain its relevance. It is not free from subjective updating requirements, and it is not necessarily stable. Moreover, historical cost is also vulnerable to abuse. In sum, all the vulnerabilities that are often attributed to fair value accounting can be equally pertinent to historical cost. It is unclear whether these political pressures will have an effect on fair value accounting, but there is no question that the issue has stirred signifi cant worldwide political debate. In short, the numbers have consequences.Sources: Adapted from Ben Hall and Nikki Tait, “Sarkozy Seeks EU Accounting Change,” The Financial Times Limited (September 30, 2008); Floyd Norris, “Banks Are Set to Receive More Leeway on Asset Values,” The New York Times (March 31, 2009); E. Orenstein, “G20 Finance Ministers Urge FASB, IASB Converge Key Standards by Mid-2013 at the Latest,” FEI Financial Reporting Blog (April 2012); and Speech at the Paris IFRS Conference, Conference/Documents/2015/Hans-Hoogervorst-speech-ParisJune-2015.pdf (June 2015).EVOLVING ISSUES FAIR VALUE, FAIR CONSEQUENCESLO 4What the public thinks accountants should do vs. what accountants think they can do.Difficult to close in light of accounting scandals.Sarbanes-Oxley Act.Public Company Accounting Oversight Board (PCAOB).Expectation GAAPMajor Challenges In Financial ReportingLO 4Nonfinancial measurements.Forward-looking information.Soft assets.Timeliness.Understandability.Financial Reporting ChallengesMajor Challenges In Financial ReportingLO 4Two sets of standards accepted for international use:U.S. GAAP, issued by the FASB.International Financial Reporting Standards (IFRS), issued by the IASB.International Accounting StandardsMajor Challenges In Financial ReportingLO 4One of the more difficult issues related to convergence and international accounting standards is that countries have different cultures and customs. For example, the former chair of the IASB explained it this way regarding Europe:“In the U.K. everything is permitted unless it is prohibited. In Germany, it is the other way around; everything is prohibited unless it is permitted. In the Netherlands, everything is prohibited even if it is permitted. And in France, everything is permitted even if it is prohibited. Add in countries like Japan, the United States and China, it becomes very difficult to meet the needs of each of these countries.”With this diversity of thinking around the world, it understandable why accounting convergence has been so elusive.Source: Sir D. Tweedie, “Remarks at the Robert P. Maxon Lectureship,” George Washington University (April 7, 2010).WHAT DO THE NUMBERS MEAN? CAN YOU DO THAT?LO 4In accounting, we frequently encounter ethical dilemmas.GAAP does not always provide an answer.Doing the right thing is not always easy or obvious.Ethics in the Environment of Financial AccountingMajor Challenges In Financial ReportingLO 4Generally accepted accounting principles (GAAP) for U.S. companies are developed by the Financial Accounting Standards Board (FASB). The FASB is a private organization. The Securities and Exchange Commission (SEC) exercises oversight over the actions of the FASB. The IASB is also a private organization. Oversight over the actions of the IASB is regulated by IOSCO. Both the IASB and the FASB have essentially the same governance structure, that is, a Foundation that provides oversight, a Board, an Advisory Council, and an Interpretations Committee. In addition, a general body that involves the public interest is part of the governance structure.The FASB relies on the SEC for regulation and enforcement of its standards. The IASB relies primarily on IOSCO for regulation and enforcement of its standards. RELEVANT FACTSSimilaritiesLO 5 Compare the procedures related to financial accounting and accounting standards under GAAP and IFRS.Both the IASB and the FASB are working together to find common grounds for convergence. A good example is the recent issuance of a new standard on revenue recognition that both organizations support. Also, the Boards are working together on other substantial projects, such as the accounting for leases.DifferencesGAAP is more detailed or rules-based. IFRS tends to simpler and more flexible in its accounting and disclosure requirements. The difference in approach has resulted in a debate about the merits of principles-based versus rules-based standards.RELEVANT FACTSSimilaritiesLO 5Differences between GAAP and IFRS should not be surprising because standard-setters have developed standards in response to different user needs. In some countries, the primary users of financial statements are private investors. In others, the primary users are tax authorities or central government planners. In the United States, investors and creditors have driven accounting-standard formulation.RELEVANT FACTSDifferencesLO 5World markets are becoming increasingly intertwined. International consumers drive Japanese cars, wear Italian shoes and Scottish woolens, drink Brazilian coffee and Indian tea, eat Swiss chocolate bars, sit on Danish furniture, watch U.S. movies, and use Arabian oil. The tremendous variety and volume of both exported and imported goods indicates the extensive involvement in international trade—for many companies, the world is their market. To provide some indication of the extent of globalization of economic activity, Illustration IFRS1-1 provides a listing of the top 20 global companies in terms of sales.ABOUT THE NUMBERSILLUSTRATION IFRS 1-1Global CompaniesLO 5International Accounting Standards Board (IASB)Issues International Financial Reporting Standards (IFRS).Standards used on most foreign exchanges. Standards used by foreign companies listing on U.S. securities exchanges. IFRS used in over 115 countries.International Standard-Setting Organizations:LO 5International Organization of Securities Commissions (IOSCO)Does not set accounting standards. Dedicated to ensuring that global markets can operate in an efficient and effective basis. 5The major key players on the international side are the:IASB and FASB. SEC and FASB.IOSCO and the SEC. IASB and IOSCO.IFRS SELF-TEST QUESTIONSLO 5International Accounting Standards Board (IASB)Composed of four organizations—International Accounting Standards Committee Foundation (IASCF).International Accounting Standards Board (IASB). Standards Advisory Council.International Financial Reporting Interpretations Committee (IFRIC). 5ILLUSTRATION IFRS 1-2International Standard-Setting StructureLO 5International Financial Reporting Standards.Framework For Financial Reporting.International Financial Reporting Interpretations.Types of PronouncementsLO 5Companies first look to:International Financial Reporting Standards;International Accounting Standards; andInterpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC).Hierarchy of IFRSLO 5IFRS is comprised of:International Financial Reporting Standards and FASB financial reporting standards.International Financial Reporting Standards, International Accounting Standards, and international accounting interpretations.International Accounting Standards and international accounting interpretations.FASB financial reporting standards and International Accounting Standards.IFRS SELF-TEST QUESTIONSLO 5The SEC appears committed to move to IFRS, assuming that certain conditions are met.The FASB and the IASB have been working diligently to (1) make their existing financial reporting standards fully compatible as soon as is practicable, and (2) coordinate their future work programs to ensure that once achieved, compatibility is maintained. International Accounting ConvergenceLO 5Which of the following statements is true?The IASB has the same number of members as the FASB.The IASB structure has both advisory and interpretation functions, but no trustees.The IASB has been in existence longer than the FASB.The IASB structure is quite similar to the FASB’s, except the IASB has a larger number of board members.IFRS SELF-TEST QUESTIONSLO 5Both the IASB and the FASB are hard at work developing standards that will lead to the elimination of major differences in the way certain transactions are accounted for and reported. In fact, beginning in 2010, the IASB (and the FASB on its joint projects with the IASB) started its policy of phasing in adoption of new major standards over several years. The major reason for this policy is to provide companies time to translate and implement international standards into practice. Much has happened in a very short period of time in the international accounting environment. While adoption of IFRS in the United States is an unlikely avenue to achieve a single set of high-quality accounting standards, there continues to be strong support for the Boards to continue their work to narrow the differences between GAAP and IFRS.ON THE HORIZONLO 5IFRS stands for:International Federation of Reporting Services.Independent Financial Reporting Standards.International Financial Reporting Standards.Integrated Financial Reporting Services.IFRS SELF-TEST QUESTIONSLO 5“Copyright © 2016 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. 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