FINANCIAL ACCOUNTING - PowerPoint Presentation

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FINANCIAL ACCOUNTING

RICHARD G. SCHROEDER MYRTLE W. CLARK JACK M. CATHEY

THEORY AND ANALYSIS: TEXT AND CASES11TH EDITIONSlide2

CHAPTER 1

THE DEVELOPMENT OF ACCOUNTING THEORYSlide3

Introduction

What is theory?

Webster defines theory as: “Systematically organized knowledge, applicable in a relatively wide variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.”Normative theoryPositive theoryWhy is the development of a general theory of accounting important?Allocating scare resourcesWhat is the relationship of accounting research to accounting theory

?

Various theories of accounting will be discussed in Chapter 4Slide4

THE EARLY HISTORY OF ACCOUNTING

Denise Schmandt-Besserat Origins of writing are actually found in counting.

Pieces of fired clay in Middle Eastern archeological sites.Tokens comprised an elaborate system of accounting that was used throughout the Middle East from approximately 8000 to 3000 B. C.Each token stood for a specific itemUsed to take inventory and keep accountsOther accounting records dating back several thousand years have been found in various parts of the world. These records indicate that at all levels of development, people desire information about their efforts and accomplishments. Slide5

THE EARLY HISTORY OF ACCOUNTING

For example the

Zenon PapyriWho was Zenon?Information about the construction projects, agricultural activities, and business operations of the private estate of Apollonius for a period of about thirty years during the third century B.C.RenaissanceItalians pursuing trade and commerce needed recordsFra Luca PacioliSlide6

THE EARLY HISTORY OF ACCOUNTING

The evolution of joint ventures into ongoing

businessesCaused need for external financial reportingThe impact of the industrial revolution and the progressive movementWidespread speculation in the securities markets, watered stocks, and large monopolies that controlled segments of the U.S. economy. 1900 report suggested that independent public accounting profession should be established to curtail observed corporate abuses.Slide7

THE EARLY HISTORY OF ACCOUNTING

The concept of

capital maintenanceViewed as a way to curb corporate abusesThe accountant as a protector of business interestsAmerican Institute of Accountants (AIA)American Association of the University Instructors in AccountingSlide8

ACCOUNTING IN THE UNITED STATES SINCE 1930

Because of fear of government intervention

Meetings between NYSE and AIAAAASECWhat caused formation of SEC?Securities Act of 1933Securities Exchange Act of 1934Difference between public and private sector formulation of accounting principlesSlide9

ACCOUNTING IN THE UNITED STATES SINCE 1930

1936 - 1938SEC: internal debate about whether it should develop accounting standards.1938

Accounting Series Release (ASR No. 4) SEC allowed private sector to set accounting principlesReports filed with SEC must be prepared in accordance with accounting principles that have “substantial authoritative support{.A Statement of Accounting PrinciplesSanders, Hatfield & MooreBecause accounting profession did not think it had time to develop theoretical framework of accounting“Do what you think is best.”Slide10

American Institute of Certified Public Accountants

(AICPA)

Formed in 1936Influence on development of accounting theoryCommittee on Accounting ProcedureAccounting Principles BoardFinancial Accounting Standards BoardEach has issued pronouncementsHave become primary source of today’s generally accepted accounting principlesSlide11

Committee on Accounting Procedure (CAP)

Formed in 1936

Professional accountantsAccounting Research Bulletins (ARBs)PronouncementsDid not dictate mandatory practiceReceived authority only from general acceptanceARBs consolidated in 1953Accounting Terminology Bulletin NO. 1, “Review and Resume” and ARB No. 43ARB 44-53 published 1953 – 1959FASB Accounting Standards Codification (Discussed later in the chapter) includes recommendations of these bulletins that have not been supersededSlide12

THE ACCOUNTING PRINCIPLES

BOARD (APB)

CAP criticizedMethods of formulating accounting principles didn’t arise from research based on theoryActing in piecemeal fashion & Issuing inconsistent standardsResulted in APBFormation and structureTypes of pronouncementsAPB OpinionsAccounting for the investment tax credit (1961)APB Opinions 2 & 4Rule 203Slide13

THE ACCOUNTING PRINCIPLES

BOARD (APB)

Criticism of the APBIndependence of membersMembers had full-time responsibilities elsewhere that could influence viewsStructure“Big 8” automatically awarded 1 memberUsually 5 or 6 other public accountants on boardResponse timePart-time members not able to investigateand resolve emergency issues in timelymannerSlide14

THE FINANCIAL ACCOUNTING STANDARDS BOARD

Because of growing criticism of APB

1971: Board of Directors of AICPA appointed 2 committees:The Wheat CommitteeHow to establish accounting principles The Trueblood CommitteeObjectives of financial statementsThe FASB was establishedSlide15

Structure of the FASB

Financial

AccountingFoundationBoard ofTrusteesAppoint

Electors

Govern

Appoint and

fund

Financial

Accounting

Standards

Advisory

Committee

(approx.

20 members)

Financial

Accounting

Standards

Board

( 7 members

)

Task Forces

of the

Standards

Board

Appoin

t

Admin. Staff

Research Staff

|

|

|

- - - - - - -

Appoint and

fundSlide16

FASB

Mission – establish standards

Types of pronouncementsStatements of Financial Accounting ConceptsStatements of Financial Accounting StandardsInterpretationsTechnical BulletinsSlide17

FASB

Emerging Issues

Lack of timely guidanceStandards OverloadToo many standardsStandard setting as a political processSome users found that best way to influence formulation of accounting standards is to attempt to influence standard settersExample: SFAS No. 123 and 123R Economic ConsequencesSlide18

GAAP

Evolution of phrase:Changed wording of auditor’s certificate brought about by meetings between NYSE and AIAThe APB’s definition“present fairly…in conformity with generally accepted accounting principles:

The Auditing Standards Executive Committee’s definitionNo singular reference source exists for all principlesMakes general acceptance of a specific principle difficultSAS 69: determining acceptance of a specific principle is difficultSlide19

SFAS No. 162

Hierarchy of GAAP

Four levelsFASB codification project reduced this to 2 levels:AuthoritativeNot authoritative

A

B

C

DSlide20

The FASB’s Accounting Standards Codification

Hundreds of accounting standards promulgated by several different accounting standard setters. Accounting standards had evolved to the point that professionals could not keep up.September, 2004: the FAF Trustees approved funding for the FASB’s codification and retrieval projectSlide21

The FASB’s Accounting Standards Codification

June 2009FASB announced Codification would be single source of all nongovernmental US GAAP effective 9/15/09.Involved following steps:Restructure all U.S. GAAP literature by topic into a single authoritative codification.Modify the standard-setting process to focus on updating the codification.Slide22

The FASB’s Accounting Standards Codification

Reasons for codificationResearching multiple authoritative sources complicated research processFASB, EITF, AICPA & SEC literatureFASB ASC contains all current authoritative accounting literatureIf guidance is not specified, first source to consider is accounting principles for similar issue with a source of authoritative GAAPNonauthoritative guidance from other sources may be considered if similar transactions aren’t discovered in GAAP.Slide23

THE ROLE OF ETHICS IN ACCOUNTING

The public accountant as a watchdog

What is basic conflict of interest facing public accountants?Slide24

Accounting in Crisis – The Events of the Early 2000s

Enron and the Accounting Scandals“Special-purpose entities” (SPEs)

Now termed variable interest entities (VIEs)Purpose:Access capitalHedge riskAllowed company to increase financial leverage and return on assets without reporting debt on balance sheetLosses were kept off Enron’s booksEnron filed for bankruptcy and stock became virtually worthless.Slide25

Accounting in Crisis – The Events of the Early 2000s

Two major changes in the accounting profession have taken place in the wake of the accounting scandals:Arthur Andersen

formerly one the Big 5 audit firms has gone out of businessSarbanes-Oxley ActPresident Bush signed into law July 2002 imposes a number of corporate governance rules on publicly traded companies (Discussed in chapter 17)Slide26

International Accounting Standards

The concept of harmonization

The IASBThe IASB’s objectives:To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observanceTo work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements.41 Statements of Accounting Standards and 13 Statements of Financial Reporting Standards to date Slide27

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2014

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 consent 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.  The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.Prepared by Kathryn Yarbrough, MBA