1460T_c01.qxd 11:11:2005 09:44 Page 19 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11: EQA Questions·19 9.Understand issues related to ethics and financial accounting.Financial accountants are called on for moral discernment and ethical decision making.Decisions sometimes are difficult because a public consensus has not emerged to formulate a comprehen- sive ethical system that provides guidelines in making ethical judgments. QUESTIONS 1.Differentiate broadly between financial accounting and efits and more on quality products,and (2)account- managerial accounting. ants and lawyers rely less on rules and law and more 2.Differentiate between "financial statements"and "finan- on professional judgment and conduct."Explain his cial reporting." comment. 3.How does accounting help the capital allocation process? 19.What is the purpose of FASB Staff Positions? 4.What are some of the major challenges facing the ac- 20.Explain the role of the Emerging Issues Task Force in es- counting profession? tablishing generally accepted accounting principles. 5.What are the major objectives of financial reporting? 21.What is the purpose of the Governmental Accounting Standards Board? 6.Of what value is a common set of standards in financial accounting and reporting? 22.What are some possible reasons why another organi- 7.What is the likely limitation of "general-purpose finan- zation,such as the Governmental Accounting Stan- cial statements"? dards Board,should not issue financial reporting stan- dards? 8.In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles 23.What are the sources of pressure that change and in- and standards? fluence the development of accounting principles and standards? 9.What was the Committee on Accounting Procedure,and 24.Some individuals have indicated that the FASB must be what were its accomplishments and failings? cognizant of the economic consequences of its pro- 10.For what purposes did the AICPA in 1959 create the Ac- nouncements.What is meant by "economic conse- counting Principles Board? quences"?What dangers exist if politics play too much of 11.Distinguish among Accounting Research Bulletins, a role in the development of financial reporting standards? Opinions of the Accounting Principles Board,and State- 25.If you were given complete authority in the matter,how ments of the Financial Accounting Standards Board. would you propose that accounting principles or stan- 12.If you had to explain or define "generally accepted ac- dards should be developed and enforced? counting principles or standards,"what essential char- 26.One writer recently noted that 99.4 percent of all com- acteristics would you include in your explanation? panies prepare statements that are in accordance with 13.In what ways was it felt that the statements issued by GAAP.Why then is there such concern about fraudulent the Financial Accounting Standards Board would carry financial reporting? greater weight than the opinions issued by the Ac- 27.What is the "expectations gap"?What is the profession counting Principles Board? doing to try to close this gap? 14.How are FASB discussion memoranda and FASB expo- 28.The Sarbanes-Oxley Act was enacted to combat fraud sure drafts related to FASB "statements"? and curb poor reporting practices.What are some key 15.Distinguish between FASB "statements of financial ac- provisions of this legislation? counting standards"and FASB "statements of financial 29.A number of foreign countries have reporting standards accounting concepts." that differ from those in the United States.What are some 16.What is Rule 203 of the Code of Professional Conduct? of the main reasons why reporting standards are often 17.Rank from the most authoritative to the least authorita- different among countries? tive,the following three items:FASB Technical Bulletins, 30.Why would it be advantageous for U.S.GAAP and AICPA Practice Bulletins,and FASB Standards. International GAAP to be the same? 18.The chairman of the FASB at one time noted that "the 31.How are financial accountants challenged in their work flow of standards can only be slowed if (1)producers to make ethical decisions?Is technical mastery of GAAP focus less on quarterly earnings per share and tax ben- not sufficient to the practice of financial accounting?
Questions • 19 9. Understand issues related to ethics and financial accounting. Financial accountants are called on for moral discernment and ethical decision making. Decisions sometimes are difficult because a public consensus has not emerged to formulate a comprehensive ethical system that provides guidelines in making ethical judgments. 1. Differentiate broadly between financial accounting and managerial accounting. 2. Differentiate between “financial statements” and “financial reporting.” 3. How does accounting help the capital allocation process? 4. What are some of the major challenges facing the accounting profession? 5. What are the major objectives of financial reporting? 6. Of what value is a common set of standards in financial accounting and reporting? 7. What is the likely limitation of “general-purpose financial statements”? 8. In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles and standards? 9. What was the Committee on Accounting Procedure, and what were its accomplishments and failings? 10. For what purposes did the AICPA in 1959 create the Accounting Principles Board? 11. Distinguish among Accounting Research Bulletins, Opinions of the Accounting Principles Board, and Statements of the Financial Accounting Standards Board. 12. If you had to explain or define “generally accepted accounting principles or standards,” what essential characteristics would you include in your explanation? 13. In what ways was it felt that the statements issued by the Financial Accounting Standards Board would carry greater weight than the opinions issued by the Accounting Principles Board? 14. How are FASB discussion memoranda and FASB exposure drafts related to FASB “statements”? 15. Distinguish between FASB “statements of financial accounting standards” and FASB “statements of financial accounting concepts.” 16. What is Rule 203 of the Code of Professional Conduct? 17. Rank from the most authoritative to the least authoritative, the following three items: FASB Technical Bulletins, AICPA Practice Bulletins, and FASB Standards. 18. The chairman of the FASB at one time noted that “the flow of standards can only be slowed if (1) producers focus less on quarterly earnings per share and tax benefits and more on quality products, and (2) accountants and lawyers rely less on rules and law and more on professional judgment and conduct.” Explain his comment. 19. What is the purpose of FASB Staff Positions? 20. Explain the role of the Emerging Issues Task Force in establishing generally accepted accounting principles. 21. What is the purpose of the Governmental Accounting Standards Board? 22. What are some possible reasons why another organization, such as the Governmental Accounting Standards Board, should not issue financial reporting standards? 23. What are the sources of pressure that change and influence the development of accounting principles and standards? 24. Some individuals have indicated that the FASB must be cognizant of the economic consequences of its pronouncements. What is meant by “economic consequences”? What dangers exist if politics play too much of a role in the development of financial reporting standards? 25. If you were given complete authority in the matter, how would you propose that accounting principles or standards should be developed and enforced? 26. One writer recently noted that 99.4 percent of all companies prepare statements that are in accordance with GAAP. Why then is there such concern about fraudulent financial reporting? 27. What is the “expectations gap”? What is the profession doing to try to close this gap? 28. The Sarbanes-Oxley Act was enacted to combat fraud and curb poor reporting practices. What are some key provisions of this legislation? 29. A number of foreign countries have reporting standards that differ from those in the United States. What are some of the main reasons why reporting standards are often different among countries? 30. Why would it be advantageous for U.S. GAAP and International GAAP to be the same? 31. How are financial accountants challenged in their work to make ethical decisions? Is technical mastery of GAAP not sufficient to the practice of financial accounting? QUESTIONS 1460T_c01.qxd 11:11:2005 09:44 Page 19 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11:
1460T_c01.qxd 11:11:2005 09:44 Page 20 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11: EQA 20.Chapter 1 Financial Accounting and Accounting Standards CONCEPTS FOR ANALYSIS CA1-1 (Financial Accounting)Alan Rodriquez has recently completed his first year of studying ac- counting.His instructor for next semester has indicated that the primary focus will be the area of finan- cial accounting. Instructions (a)Differentiate between financial accounting and managerial accounting. (b)One part of financial accounting involves the preparation of financial statements.What are the fi- nancial statements most frequently provided? (c)What is the difference between financial statements and financial reporting? CA1-2 (Objectives of Financial Reporting)Celia Cruz,a recent graduate of the local state university,is presently employed by a large manufacturing company.She has been asked by Angeles Ochoa,controller, to prepare the company's response to a current Discussion Memorandum published by the Financial Accounting Standards Board (FASB).Cruz knows that the FASB has issued seven Statements of Financial Accounting Concepts,and she believes that these concept statements could be used to support the company's response to the Discussion Memorandum.She has prepared a rough draft of the response citing Statement of Financial Accounting Concepts No.1,"Objectives of Financial Reporting by Business Enterprises." Instructions (a)Identify the three objectives of financial reporting as presented in Statement of Financial Account- ing Concepts No.1 (SFAC No.1). (b) Describe the level of sophistication expected of the users of financial information by SFAC No.1. (CMA adapted) CA1-3 (Accounting Numbers and the Environment)Hardly a day goes by without an article ap- pearing on the crises affecting many of our financial institutions in the United States.It is estimated that the savings and loan (S&L)debacle of the 1980s,for example,ended up costing $500 billion ($2,000 for every man,woman,and child in the United States).Some argue that if the S&Ls had been required to re port their investments at market value instead of cost,large losses would have been reported earlier,which ⊕ would have signaled regulators to close those S&Ls and,therefore,minimize the losses to U.S.taxpayers. Instructions Explain how reported accounting numbers might affect an individual's perceptions and actions.Cite two examples. CA1-4 (Need for Accounting Standards)Some argue that having various organizations establish ac- counting principles is wasteful and inefficient.Rather than mandating accounting standards,each com- pany could voluntarily disclose the type of information it considered important.In addition,if an investor wants additional information,the investor could contact the company and pay to receive the additional information desired. Instructions Comment on the appropriateness of this viewpoint. CA1-5 (AICPA's Role in Standard Setting)One of the major groups involved in the standard-setting process is the American Institute of Certified Public Accountants.Initially it was the primary organiza- tion that established accounting principles in the United States.Subsequently it relinquished most of its power to the FASB. Instructions (a)Identify the two committees of the AICPA that established accounting principles prior to the es- tablishment of the FASB. (b)Speculate as to why these two organizations failed.In your answer,identify steps the FASB has taken to avoid failure. (c)What is the present role of the AICPA in the standard-setting environment? CA1-6 (FASB Role in Standard Setting)A press release announcing the appointment of the trustees of the new Financial Accounting Foundation stated that the Financial Accounting Standards Board(to be appointed by the trustees)"...will become the established authority for setting accounting principles under which corporations report to the shareholders and others"(AICPA news release July 20,1972). Instructions (a)Identify the sponsoring organization of the FASB and the process by which the FASB arrives at a decision and issues an accounting standard
CONCEPTS FOR ANALYSIS CA1-1 (Financial Accounting) Alan Rodriquez has recently completed his first year of studying accounting. His instructor for next semester has indicated that the primary focus will be the area of financial accounting. Instructions (a) Differentiate between financial accounting and managerial accounting. (b) One part of financial accounting involves the preparation of financial statements. What are the financial statements most frequently provided? (c) What is the difference between financial statements and financial reporting? CA1-2 (Objectives of Financial Reporting) Celia Cruz, a recent graduate of the local state university, is presently employed by a large manufacturing company. She has been asked by Angeles Ochoa, controller, to prepare the company’s response to a current Discussion Memorandum published by the Financial Accounting Standards Board (FASB). Cruz knows that the FASB has issued seven Statements of Financial Accounting Concepts, and she believes that these concept statements could be used to support the company’s response to the Discussion Memorandum. She has prepared a rough draft of the response citing Statement of Financial Accounting Concepts No. 1, “Objectives of Financial Reporting by Business Enterprises.” Instructions (a) Identify the three objectives of financial reporting as presented in Statement of Financial Accounting Concepts No. 1 (SFAC No. 1). (b) Describe the level of sophistication expected of the users of financial information by SFAC No. 1. (CMA adapted) CA1-3 (Accounting Numbers and the Environment) Hardly a day goes by without an article appearing on the crises affecting many of our financial institutions in the United States. It is estimated that the savings and loan (S&L) debacle of the 1980s, for example, ended up costing $500 billion ($2,000 for every man, woman, and child in the United States). Some argue that if the S&Ls had been required to report their investments at market value instead of cost, large losses would have been reported earlier, which would have signaled regulators to close those S&Ls and, therefore, minimize the losses to U.S. taxpayers. Instructions Explain how reported accounting numbers might affect an individual’s perceptions and actions. Cite two examples. CA1-4 (Need for Accounting Standards) Some argue that having various organizations establish accounting principles is wasteful and inefficient. Rather than mandating accounting standards, each company could voluntarily disclose the type of information it considered important. In addition, if an investor wants additional information, the investor could contact the company and pay to receive the additional information desired. Instructions Comment on the appropriateness of this viewpoint. CA1-5 (AICPA’s Role in Standard Setting) One of the major groups involved in the standard-setting process is the American Institute of Certified Public Accountants. Initially it was the primary organization that established accounting principles in the United States. Subsequently it relinquished most of its power to the FASB. Instructions (a) Identify the two committees of the AICPA that established accounting principles prior to the establishment of the FASB. (b) Speculate as to why these two organizations failed. In your answer, identify steps the FASB has taken to avoid failure. (c) What is the present role of the AICPA in the standard-setting environment? CA1-6 (FASB Role in Standard Setting) A press release announcing the appointment of the trustees of the new Financial Accounting Foundation stated that the Financial Accounting Standards Board (to be appointed by the trustees) “. . . will become the established authority for setting accounting principles under which corporations report to the shareholders and others” (AICPA news release July 20, 1972). Instructions (a) Identify the sponsoring organization of the FASB and the process by which the FASB arrives at a decision and issues an accounting standard. 20 • Chapter 1 Financial Accounting and Accounting Standards 1460T_c01.qxd 11:11:2005 09:44 Page 20 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11:
1460T_c01.qxd 11:11:2005 09:44 Page 21Nishant-16 NIshant-16:Desktop Folder:prakash 11/11: EQA Concepts for Analysis.21 (b)Indicate the major types of pronouncements issued by the FASB and the purposes of each of these pronouncements. CA1-7 (Government Role in Standard Setting)Recently an article stated "the setting of accounting standards in the United States is now about 70 years old.It is a unique process in our society,one that has undergone numerous changes over the years.The standards are established by a private sector en- tity that has no dominant sponsor and is not part of any professional organization or trade association. The governmental entity that provides oversight,on the other hand,is far more a friend than a competi- tor or an antagonist." Instructions Identify the governmental entity that provides oversight and indicate its role in the standard-setting process CA1-8 (Politicization of Standard Setting)Some accountants have said that politicization in the de- velopment and acceptance of generally accepted accounting principles(i.e.,standard setting)is taking place.Some use the term "politicization"in a narrow sense to mean the influence by governmental agen- cies,particularly the Securities and Exchange Commission,on the development of generally accepted accounting principles.Others use it more broadly to mean the compromise that results when the bodies responsible for developing generally accepted accounting principles are pressured by interest groups(SEC, American Accounting Association,businesses through their various organizations,Institute of Manage- ment Accountants,financial analysts,bankers,lawyers,and so on). Instructions (a)The Committee on Accounting Procedure of the AICPA was established in the mid-to late 1930s and functioned until 1959,at which time the Accounting Principles Board came into existence.In 1973,the Financial Accounting Standards Board was formed and the APB went out of existence. Do the reasons these groups were formed,their methods of operation while in existence,and the reasons for the demise of the first two indicate an increasing politicization (as the term is used in the broad sense)of accounting standard setting?Explain your answer by indicating how the CAP the APB,and the FASB operated or operate.Cite specific developments that tend to support your answer. (b)What arguments can be raised to support the "politicization"of accounting standard setting? (c)What arguments can be raised against the "politicization"of accounting standard setting? (CMA adapted) CA1-9 (Models for Setting Accounting Standards)Presented below are three models for setting accounting standards. 1.The purely political approach,where national legislative action decrees accounting standards. 2.The private,professional approach,where financial accounting standards are set and enforced by private professional actions only. 3.The public/private mixed approach,where standards are basically set by private-sector bodies that behave as though they were public agencies and whose standards to a great extent are enforced through governmental agencies. Instructions (a)Which of these three models best describes standard setting in the United States?Comment on your answer. (b)Why do companies,financial analysts,labor unions,industry trade associations,and others take such an active interest in standard setting? (c)Cite an example of a group other than the FASB that attempts to establish accounting standards. Speculate as to why another group might wish to set its own standards. CA1-10 (Standard-Setting Terminology)Andrew Wyeth,an administrator at a major university,re- cently said,"I've got some CDs in my IRA,which I set up to beat the IRS."As elsewhere,in the world of accounting and finance,it often helps to be fluent in abbreviations and acronyms. Instructions Presented below is a list of common accounting acronyms.Identify the term for which each acronym stands,and provide a brief definition of each term. (a)AICPA (e)FAF ( 、 CPA (m)GASB (b)CAP (f)FASAC (j)FASB (c)ARB (g)SOP (k)SEC (d)APB (h)GAAP (IASB
(b) Indicate the major types of pronouncements issued by the FASB and the purposes of each of these pronouncements. CA1-7 (Government Role in Standard Setting) Recently an article stated “the setting of accounting standards in the United States is now about 70 years old. It is a unique process in our society, one that has undergone numerous changes over the years. The standards are established by a private sector entity that has no dominant sponsor and is not part of any professional organization or trade association. The governmental entity that provides oversight, on the other hand, is far more a friend than a competitor or an antagonist.” Instructions Identify the governmental entity that provides oversight and indicate its role in the standard-setting process. CA1-8 (Politicization of Standard Setting) Some accountants have said that politicization in the development and acceptance of generally accepted accounting principles (i.e., standard setting) is taking place. Some use the term “politicization” in a narrow sense to mean the influence by governmental agencies, particularly the Securities and Exchange Commission, on the development of generally accepted accounting principles. Others use it more broadly to mean the compromise that results when the bodies responsible for developing generally accepted accounting principles are pressured by interest groups (SEC, American Accounting Association, businesses through their various organizations, Institute of Management Accountants, financial analysts, bankers, lawyers, and so on). Instructions (a) The Committee on Accounting Procedure of the AICPA was established in the mid- to late 1930s and functioned until 1959, at which time the Accounting Principles Board came into existence. In 1973, the Financial Accounting Standards Board was formed and the APB went out of existence. Do the reasons these groups were formed, their methods of operation while in existence, and the reasons for the demise of the first two indicate an increasing politicization (as the term is used in the broad sense) of accounting standard setting? Explain your answer by indicating how the CAP, the APB, and the FASB operated or operate. Cite specific developments that tend to support your answer. (b) What arguments can be raised to support the “politicization” of accounting standard setting? (c) What arguments can be raised against the “politicization” of accounting standard setting? (CMA adapted) CA1-9 (Models for Setting Accounting Standards) Presented below are three models for setting accounting standards. 1. The purely political approach, where national legislative action decrees accounting standards. 2. The private, professional approach, where financial accounting standards are set and enforced by private professional actions only. 3. The public/private mixed approach, where standards are basically set by private-sector bodies that behave as though they were public agencies and whose standards to a great extent are enforced through governmental agencies. Instructions (a) Which of these three models best describes standard setting in the United States? Comment on your answer. (b) Why do companies, financial analysts, labor unions, industry trade associations, and others take such an active interest in standard setting? (c) Cite an example of a group other than the FASB that attempts to establish accounting standards. Speculate as to why another group might wish to set its own standards. CA1-10 (Standard-Setting Terminology) Andrew Wyeth, an administrator at a major university, recently said, “I’ve got some CDs in my IRA, which I set up to beat the IRS.” As elsewhere, in the world of accounting and finance, it often helps to be fluent in abbreviations and acronyms. Instructions Presented below is a list of common accounting acronyms. Identify the term for which each acronym stands, and provide a brief definition of each term. (a) AICPA (e) FAF (i) CPA (m) GASB (b) CAP (f) FASAC (j) FASB (c) ARB (g) SOP (k) SEC (d) APB (h) GAAP (l) IASB Concepts for Analysis • 21 1460T_c01.qxd 11:11:2005 09:44 Page 21 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11:
1460T_c01.qxd 11:11:2005 09:44 Page 22 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11: EQA 22.Chapter 1 Financial Accounting and Accounting Standards CA1-11 (Accounting Organizations and Documents Issued)Presented below are a number of ac- counting organizations and types of documents they have issued. Instructions Match the appropriate document to the organization involved.Note that more than one document may be issued by the same organization.If no document is provided for an organization,write in"0." Organization Document 1. Accounting Standards Executive Committee (a)Opinions 2. Accounting Principles Board (b)Practice Bulletins 3 Committee on Accounting Procedure (c)Accounting Research Bulletins 4. Financial Accounting Standards Board (d)Financial Accounting Standards (e)Statements of Position CA1-12 (Accounting Pronouncements)Standard setting bodies have issued a number of authoritative pronouncements.A list is provided on the left,below,with a description of these pronouncements on the right Instructions Match the description to the pronouncements 1. Staff Positions (a)Official pronouncements of the APB 2. Interpretations (of the Financial Account- (b)Sets forth fundamental objectives and ing Standards Board) concepts that will be used in develop- 3. Statement of Financial Accounting ing future standards. Standards (c) Primary document of the FASB that es- 4. EITF Statements tablishes GAAP. 5. Opinions (d)Provides additional guidance on im- 6. Statement of Financial Accounting plementing or applying FASB Stan- Concepts dards or Interpretations. (e)Provides guidance on how to account for new and unusual financial transac- ⊕ tions that have the potential for creat- ing diversity in financial reporting practices. ( Represent extensions or modifications of existing standards. CA1-13 (Issues Involving Standard Setting)When the FASB issues new standards,the implementation date is usually 12 months from date of issuance,with early implementation encouraged.Paula Popovich, controller,discusses with her financial vice president the need for early implementation of a standard that would result in a fairer presentation of the company's financial condition and earnings.When the financial vice president determines that early implementation of the standard will adversely affect the reported net income for the year,he discourages Popovich from implementing the standard until it is required. Instructions Answer the following questions. (a)What,if any,is the ethical issue involved in this case? (b)Is the financial vice president acting improperly or immorally? (c)What does Popovich have to gain by advocacy of early implementation? (d )Which stakeholders might be affected by the decision against early implementation? (CMA adapted) CA1-14 (Securities and Exchange Commission)The U.S.Securities and Exchange Commission (SEC)was created in 1934 and consists of five commissioners and a large professional staff.The SEC professional staff is organized into five divisions and several principal offices.The primary objective of the SEC is to support fair securities markets.The SEC also strives to foster enlightened stockholder par- ticipation in corporate decisions of publicly traded companies.The SEC has a significant presence in fi- nancial markets,the development of accounting practices,and corporation-shareholder relations,and has the power to exert influence on entities whose actions lie within the scope of its authority. Instructions (a)Explain from where the Securities and Exchange Commission receives its authority. (b)Describe the official role of the Securities and Exchange Commission in the development of fi- nancial accounting theory and practices
CA1-11 (Accounting Organizations and Documents Issued) Presented below are a number of accounting organizations and types of documents they have issued. Instructions Match the appropriate document to the organization involved. Note that more than one document may be issued by the same organization. If no document is provided for an organization, write in “0.” Organization 1. _____ Accounting Standards Executive Committee 2. _____ Accounting Principles Board 3. _____ Committee on Accounting Procedure 4. _____ Financial Accounting Standards Board CA1-12 (Accounting Pronouncements) Standard setting bodies have issued a number of authoritative pronouncements. A list is provided on the left, below, with a description of these pronouncements on the right. Instructions Match the description to the pronouncements. 1. _____ Staff Positions 2. _____ Interpretations (of the Financial Accounting Standards Board) 3. _____ Statement of Financial Accounting Standards 4. _____ EITF Statements 5. _____ Opinions 6. _____ Statement of Financial Accounting Concepts CA1-13 (Issues Involving Standard Setting) When the FASB issues new standards, the implementation date is usually 12 months from date of issuance, with early implementation encouraged. Paula Popovich, controller, discusses with her financial vice president the need for early implementation of a standard that would result in a fairer presentation of the company’s financial condition and earnings. When the financial vice president determines that early implementation of the standard will adversely affect the reported net income for the year, he discourages Popovich from implementing the standard until it is required. Instructions Answer the following questions. (a) What, if any, is the ethical issue involved in this case? (b) Is the financial vice president acting improperly or immorally? (c) What does Popovich have to gain by advocacy of early implementation? (d) Which stakeholders might be affected by the decision against early implementation? (CMA adapted) CA1-14 (Securities and Exchange Commission) The U.S. Securities and Exchange Commission (SEC) was created in 1934 and consists of five commissioners and a large professional staff. The SEC professional staff is organized into five divisions and several principal offices. The primary objective of the SEC is to support fair securities markets. The SEC also strives to foster enlightened stockholder participation in corporate decisions of publicly traded companies. The SEC has a significant presence in financial markets, the development of accounting practices, and corporation-shareholder relations, and has the power to exert influence on entities whose actions lie within the scope of its authority. Instructions (a) Explain from where the Securities and Exchange Commission receives its authority. (b) Describe the official role of the Securities and Exchange Commission in the development of financial accounting theory and practices. 22 • Chapter 1 Financial Accounting and Accounting Standards Document (a) Opinions (b) Practice Bulletins (c) Accounting Research Bulletins (d) Financial Accounting Standards (e) Statements of Position (a) Official pronouncements of the APB. (b) Sets forth fundamental objectives and concepts that will be used in developing future standards. (c) Primary document of the FASB that establishes GAAP. (d) Provides additional guidance on implementing or applying FASB Standards or Interpretations. (e) Provides guidance on how to account for new and unusual financial transactions that have the potential for creating diversity in financial reporting practices. (f) Represent extensions or modifications of existing standards. 1460T_c01.qxd 11:11:2005 09:44 Page 22 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11:
1460T_c01.qxd 11:11:2005 09:44 Page 23 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11: EQA Concepts for Analysis.23 (c)Discuss the interrelationship between the Securities and Exchange Commission and the Financial Accounting Standards Board with respect to the development and establishment of financial accounting theory and practices (CMA adapted) CA1-15 (Standard-Setting Process)In 1973,the responsibility for developing and issuing rules on ac- counting practices was given to the Financial Accounting Foundation and,in particular,to an arm of the foundation called the Financial Accounting Standards Board (FASB).The generally accepted accounting principles established by the FASB are enunciated through a publication series entitled Statements of Financial Accounting Standards.These statements are issued periodically,and over 150 have been issued. The statements have a significant influence on the way in which financial statements are prepared by U.S. corporations. Instructions (a)Describe the process by which a topic is selected or identified as appropriate for study by the Financial Accounting Standards Board(FASB). (b) Once a topic is considered appropriate for consideration by the FASB,a series of steps is followed before a Statement of Financial Accounting Standards is issued.Describe the major steps in the process leading to the issuance of a standard. (c)Identify at least three other organizations that influence the setting of generally accepted ac- counting principles(GAAP). (CMA adapted) CA1-16 (Financial Reporting Pressures)Presented below is abbreviated testimony from Troy Nor- mand in the WorldCom case.He was a manager in the corporate reporting department and is one of five individuals who pleaded guilty.He is testifying in hopes of receiving no prison time when he is ulti- mately sentenced. Q.Mr.Normand,if you could just describe for the jury how the meeting started and what was said dur- ing the meeting? A.I can't recall exactly who initiated the discussion,but right away Scott Sullivan acknowledged that he was aware we had problems with the entries,David Myers had informed him,and we were consid- ering resigning. He said that he respected our concerns but that we weren't being asked to do anything that he believed was wrong.He mentioned that he acknowledged that the company had lost focus quite a bit due to the preparations for the Sprint merger,and that he was putting plans in place and projects in place to try to determine where the problems were,why the costs were so high. He did say he believed that the initial statements that we produced,that the line costs in those state- ments could not have been as high as they were,that he believes something was wrong and there was no way that the costs were that high. I informed him that I didn't believe the entry we were being asked to do was right,that I was scared, and I didn't want to put myself in a position of going to jail for him or the company.He responded that he didn't believe anything was wrong,nobody was going to be going to jail,but that if it later was found to be wrong,that he would be the person going to jail,not me. He asked that I stay,don't jump off the plane,let him land it softly,that's basically how he put it.And he mentioned that he had a discussion with Bernie Ebbers asking Bernie to reduce projections going for- ward and that Bernie had refused. Q.Mr.Normand,you said that Mr.Sullivan said something about don't jump out of the plane.What did you understand him to mean when he said that? A.Not to quit. Q.During this meeting,did Mr.Sullivan say anything about whether you would be asked to make en- tries like this in the future? A.Yes,he made a comment that from that point going forward we wouldn't be asked to record any en- tries,high-level late adjustments,that the numbers would be the numbers. Q.What did you understand that to be mean,the numbers would be the numbers? A.That after the preliminary statements were issued,with the exception of any normal transaction,valid transaction,we wouldn't be asked to be recording any more late entries Q.I believe you testified that Mr.Sullivan said something about the line cost numbers not being accu- rate.Did he ask you to conduct any analysis to determine whether the line cost numbers were accurate? A.No,he did not. Q.Did anyone ever ask you to do that? A.No. O.Did you ever conduct any such analysis? A. No,I didn't
(c) Discuss the interrelationship between the Securities and Exchange Commission and the Financial Accounting Standards Board with respect to the development and establishment of financial accounting theory and practices. (CMA adapted) CA1-15 (Standard-Setting Process) In 1973, the responsibility for developing and issuing rules on accounting practices was given to the Financial Accounting Foundation and, in particular, to an arm of the foundation called the Financial Accounting Standards Board (FASB). The generally accepted accounting principles established by the FASB are enunciated through a publication series entitled Statements of Financial Accounting Standards. These statements are issued periodically, and over 150 have been issued. The statements have a significant influence on the way in which financial statements are prepared by U.S. corporations. Instructions (a) Describe the process by which a topic is selected or identified as appropriate for study by the Financial Accounting Standards Board (FASB). (b) Once a topic is considered appropriate for consideration by the FASB, a series of steps is followed before a Statement of Financial Accounting Standards is issued. Describe the major steps in the process leading to the issuance of a standard. (c) Identify at least three other organizations that influence the setting of generally accepted accounting principles (GAAP). (CMA adapted) CA1-16 (Financial Reporting Pressures) Presented below is abbreviated testimony from Troy Normand in the WorldCom case. He was a manager in the corporate reporting department and is one of five individuals who pleaded guilty. He is testifying in hopes of receiving no prison time when he is ultimately sentenced. Q. Mr. Normand, if you could just describe for the jury how the meeting started and what was said during the meeting? A. I can’t recall exactly who initiated the discussion, but right away Scott Sullivan acknowledged that he was aware we had problems with the entries, David Myers had informed him, and we were considering resigning. He said that he respected our concerns but that we weren’t being asked to do anything that he believed was wrong. He mentioned that he acknowledged that the company had lost focus quite a bit due to the preparations for the Sprint merger, and that he was putting plans in place and projects in place to try to determine where the problems were, why the costs were so high. He did say he believed that the initial statements that we produced, that the line costs in those statements could not have been as high as they were, that he believes something was wrong and there was no way that the costs were that high. I informed him that I didn’t believe the entry we were being asked to do was right, that I was scared, and I didn’t want to put myself in a position of going to jail for him or the company. He responded that he didn’t believe anything was wrong, nobody was going to be going to jail, but that if it later was found to be wrong, that he would be the person going to jail, not me. He asked that I stay, don’t jump off the plane, let him land it softly, that’s basically how he put it. And he mentioned that he had a discussion with Bernie Ebbers asking Bernie to reduce projections going forward and that Bernie had refused. Q. Mr. Normand, you said that Mr. Sullivan said something about don’t jump out of the plane. What did you understand him to mean when he said that? A. Not to quit. Q. During this meeting, did Mr. Sullivan say anything about whether you would be asked to make entries like this in the future? A. Yes, he made a comment that from that point going forward we wouldn’t be asked to record any entries, high-level late adjustments, that the numbers would be the numbers. Q. What did you understand that to be mean, the numbers would be the numbers? A. That after the preliminary statements were issued, with the exception of any normal transaction, valid transaction, we wouldn’t be asked to be recording any more late entries. Q. I believe you testified that Mr. Sullivan said something about the line cost numbers not being accurate. Did he ask you to conduct any analysis to determine whether the line cost numbers were accurate? A. No, he did not. Q. Did anyone ever ask you to do that? A. No. Q. Did you ever conduct any such analysis? A. No, I didn’t. Concepts for Analysis • 23 1460T_c01.qxd 11:11:2005 09:44 Page 23 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11:
1460T_c01.qxd 11:11:2005 09:44 Page 24 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11: EQA 24.Chapter 1 Financial Accounting and Accounting Standards Q.During this meeting,did Mr.Sullivan ever provide any accounting justification for the entry you were asked to make? A.No,he did not. O.Did anything else happen during the meeting? A.I don't recall anything else. O.How did you feel after this meeting? A.Not much better actually.I left his office not convinced in any way that what we were asked to do was right.However,I did question myself to some degree after talking with him wondering whether I was making something more out of what was really there. Instructions Answer the following questions. (a)What appears to be the ethical issue involved in this case? (b)Is Troy Normand acting improperly or immorally? (c)What would you do if you were Troy Normand? (d)Who are the major stakeholders in this case? CA1-17 (Economic Consequences)Presented below are comments made in the financial press. Instructions Prepare responses to the requirements in each item. (a)Rep.John Dingell,the ranking Democrat on the House Commerce Committee,threw his support behind the FASB's controversial derivatives accounting standard and encouraged the FASB to adopt the rule promptly.Indicate why a member of Congress might feel obligated to comment on this proposed FASB standard. (b)In a strongly worded letter to Senator Lauch Faircloth(R-NC)and House Banking Committee Chairman Jim Leach(R-IA),the American Institute of Certified Public Accountants(AICPA)cau- tioned against government intervention in the accounting standard-setting process,warning that it had the potential of jeopardizing U.S.capital markets.Explain how government intervention could possibly affect capital markets adversely. ⊕ CA1-18 (Standard-Setting Process,Economic Consequences)The following letter was sent to the SEC and the FASB by leaders of the business community. Dear Sirs: The FASB has been struggling with accounting for derivatives and hedging for many years.The FASB has now developed,over the last few weeks,a new approach that it proposes to adopt as a final stan- dard.We understand that the Board intends to adopt this new approach as a final standard without exposing it for public comment and debate,despite the evident complexity of the new approach,the speed with which it has been developed and the significant changes to the exposure draft since it was released more than one year ago.Instead,the Board plans to allow only a brief review by selected parties,limited to issues of operationality and clarity,and would exclude questions as to the merits of the proposed approach. As the FASB itself has said throughout this process,its mission does not permit it to consider matters that go beyond accounting and reporting considerations.Accordingly,the FASB may not have ade- quately considered the wide range of concerns that have been expressed about the derivatives and hedging proposal,including concerns related to the potential impact on the capital markets,the weak- ening of companies ability to manage risk,and the adverse control implications of implementing costly and complex new rules imposed at the same time as other major initiatives,including the Year 2000 issues and a single European currency.We believe that these crucial issues must be considered,if not by the FASB,then by the Securities and Exchange Commission,other regulatory agencies,or Congress We believe it is essential that the FASB solicit all comments in order to identify and address all ma- terial issues that may exist before issuing a final standard.We understand the desire to bring this process to a prompt conclusion,but the underlying issues are so important to this nation's businesses, the customers they serve and the economy as a whole that expediency cannot be the dominant con- sideration.As a result,we urge the FASB to expose its new proposal for public comment,following the established due process procedures that are essential to acceptance of its standards,and provid- ing sufficient time to affected parties to understand and assess the new approach. We also urge the SEC to study the comments received in order to assess the impact that these pro- posed rules may have on the capital markets,on companies'risk management practices,and on man- agement and financial controls.These vital public policy matters deserve consideration as part of the Commission's oversight responsibilities
Q. During this meeting, did Mr. Sullivan ever provide any accounting justification for the entry you were asked to make? A. No, he did not. Q. Did anything else happen during the meeting? A. I don’t recall anything else. Q. How did you feel after this meeting? A. Not much better actually. I left his office not convinced in any way that what we were asked to do was right. However, I did question myself to some degree after talking with him wondering whether I was making something more out of what was really there. Instructions Answer the following questions. (a) What appears to be the ethical issue involved in this case? (b) Is Troy Normand acting improperly or immorally? (c) What would you do if you were Troy Normand? (d) Who are the major stakeholders in this case? CA1-17 (Economic Consequences) Presented below are comments made in the financial press. Instructions Prepare responses to the requirements in each item. (a) Rep. John Dingell, the ranking Democrat on the House Commerce Committee, threw his support behind the FASB’s controversial derivatives accounting standard and encouraged the FASB to adopt the rule promptly. Indicate why a member of Congress might feel obligated to comment on this proposed FASB standard. (b) In a strongly worded letter to Senator Lauch Faircloth (R-NC) and House Banking Committee Chairman Jim Leach (R-IA), the American Institute of Certified Public Accountants (AICPA) cautioned against government intervention in the accounting standard-setting process, warning that it had the potential of jeopardizing U.S. capital markets. Explain how government intervention could possibly affect capital markets adversely. CA1-18 (Standard-Setting Process, Economic Consequences) The following letter was sent to the SEC and the FASB by leaders of the business community. Dear Sirs: The FASB has been struggling with accounting for derivatives and hedging for many years. The FASB has now developed, over the last few weeks, a new approach that it proposes to adopt as a final standard. We understand that the Board intends to adopt this new approach as a final standard without exposing it for public comment and debate, despite the evident complexity of the new approach, the speed with which it has been developed and the significant changes to the exposure draft since it was released more than one year ago. Instead, the Board plans to allow only a brief review by selected parties, limited to issues of operationality and clarity, and would exclude questions as to the merits of the proposed approach. As the FASB itself has said throughout this process, its mission does not permit it to consider matters that go beyond accounting and reporting considerations. Accordingly, the FASB may not have adequately considered the wide range of concerns that have been expressed about the derivatives and hedging proposal, including concerns related to the potential impact on the capital markets, the weakening of companies’ ability to manage risk, and the adverse control implications of implementing costly and complex new rules imposed at the same time as other major initiatives, including the Year 2000 issues and a single European currency. We believe that these crucial issues must be considered, if not by the FASB, then by the Securities and Exchange Commission, other regulatory agencies, or Congress. We believe it is essential that the FASB solicit all comments in order to identify and address all material issues that may exist before issuing a final standard. We understand the desire to bring this process to a prompt conclusion, but the underlying issues are so important to this nation’s businesses, the customers they serve and the economy as a whole that expediency cannot be the dominant consideration. As a result, we urge the FASB to expose its new proposal for public comment, following the established due process procedures that are essential to acceptance of its standards, and providing sufficient time to affected parties to understand and assess the new approach. We also urge the SEC to study the comments received in order to assess the impact that these proposed rules may have on the capital markets, on companies’ risk management practices, and on management and financial controls. These vital public policy matters deserve consideration as part of the Commission’s oversight responsibilities. 24 • Chapter 1 Financial Accounting and Accounting Standards 1460T_c01.qxd 11:11:2005 09:44 Page 24 Nishant-16 NIshant-16:Desktop Folder:prakash 11/11:
1460T_c01.qxd12/8/0509:05 am Page25 EQA Using Your Judgment .25 We believe that these steps are essential if the FASB is to produce the best possible accounting stan- dard while minimizing adverse economic effects and maintaining the competitiveness of U.S.busi- nesses in the international marketplace Very truly yours, (This letter was signed by the chairs of 22 of the largest U.S.companies.) Instructions Answer the following questions. (a)Explain the "due process"procedures followed by the FASB in developing a financial reporting standard. (b)What is meant by the term "economic consequences"in accounting standard setting? (c)What economic consequences arguments are used in this letter? (d)What do you believe is the main point of the letter? (e) Why do you believe a copy of this letter was sent by the business community to influential mem- bers of the United States Congress? USING YOUR JUDGMENT Financial Reporting Problem Kate Jackson,a new staff accountant,is confused because of the complexities involving accounting stan- dard setting.Specifically,she is confused by the number of bodies issuing financial reporting standards of one kind or another and the level of authoritative support that can be attached to these reporting stan- dards.Kate decides that she must review the environment in which accounting standards are set,if she is to increase her understanding of the accounting profession. Kate recalls that during her accounting education there was a chapter or two regarding the environ- ment of financial accounting and the development of accounting standards.However,she remembers that her instructor placed little emphasis on these chapters. Instructions (a)Help Kate by identifying key organizations involved in accounting standard setting. (b)Kate asks for guidance regarding authoritative support.Please assist her by explaining what is meant by authoritative support. (c)Give Kate a historical overview of how standard setting has evolved so that she will not feel that she is the only one to be confused. (d)What authority for compliance with GAAP has existed throughout the period of standard setting? International Reporting Case Michael Sharpe,former Deputy Chairman of the International Accounting Standards Committee (IASC), made the following comments to the 63rd Annual Conference of the Financial Executives Institute(FED). There is an irreversible movement towards the harmonization of financial reporting throughout the world.The international capital markets require an end to: 1 The confusion caused by international companies announcing different results depending on the set of accounting standards applied.Recent announcements by Daimler-Benz [now DaimlerChrysler] highlight the confusion that this causes. 2 Companies in some countries obtaining unfair commercial advantages from the use of particular na- tional accounting standards. The complications in negotiating commercial arrangements for international joint ventures caused by different accounting requirements. 4 The inefficiency of international companies having to understand and use a myriad of different ac- counting standards depending on the countries in which they operate and the countries in which they raise capital and debt.Executive talent is wasted on keeping up to date with numerous sets of accounting standards and the never-ending changes to them The inefficiency of investment managers,bankers,and financial analysts as they seek to compare fi- nancial reporting drawn up in accordance with different sets of accounting standards
We believe that these steps are essential if the FASB is to produce the best possible accounting standard while minimizing adverse economic effects and maintaining the competitiveness of U.S. businesses in the international marketplace. Very truly yours, (This letter was signed by the chairs of 22 of the largest U.S. companies.) Instructions Answer the following questions. (a) Explain the “due process” procedures followed by the FASB in developing a financial reporting standard. (b) What is meant by the term “economic consequences” in accounting standard setting? (c) What economic consequences arguments are used in this letter? (d) What do you believe is the main point of the letter? (e) Why do you believe a copy of this letter was sent by the business community to influential members of the United States Congress? Using Your Judgment • 25 USING YOUR JUDGMENT Financial Reporting Problem Kate Jackson, a new staff accountant, is confused because of the complexities involving accounting standard setting. Specifically, she is confused by the number of bodies issuing financial reporting standards of one kind or another and the level of authoritative support that can be attached to these reporting standards. Kate decides that she must review the environment in which accounting standards are set, if she is to increase her understanding of the accounting profession. Kate recalls that during her accounting education there was a chapter or two regarding the environment of financial accounting and the development of accounting standards. However, she remembers that her instructor placed little emphasis on these chapters. Instructions (a) Help Kate by identifying key organizations involved in accounting standard setting. (b) Kate asks for guidance regarding authoritative support. Please assist her by explaining what is meant by authoritative support. (c) Give Kate a historical overview of how standard setting has evolved so that she will not feel that she is the only one to be confused. (d) What authority for compliance with GAAP has existed throughout the period of standard setting? International Reporting Case Michael Sharpe, former Deputy Chairman of the International Accounting Standards Committee (IASC), made the following comments to the 63rd Annual Conference of the Financial Executives Institute (FEI). There is an irreversible movement towards the harmonization of financial reporting throughout the world. The international capital markets require an end to: 1 The confusion caused by international companies announcing different results depending on the set of accounting standards applied. Recent announcements by Daimler-Benz [now DaimlerChrysler] highlight the confusion that this causes. 2 Companies in some countries obtaining unfair commercial advantages from the use of particular national accounting standards. 3 The complications in negotiating commercial arrangements for international joint ventures caused by different accounting requirements. 4 The inefficiency of international companies having to understand and use a myriad of different accounting standards depending on the countries in which they operate and the countries in which they raise capital and debt. Executive talent is wasted on keeping up to date with numerous sets of accounting standards and the never-ending changes to them. 5 The inefficiency of investment managers, bankers, and financial analysts as they seek to compare financial reporting drawn up in accordance with different sets of accounting standards. 1460T_c01.qxd 12/8/05 09:05 am Page 25
1460T_c01.qxd12/8/0509:05 am Page26 EQA 26.Chapter 1 Financial Accounting and Accounting Standards 6 Failure of many stock exchanges and regulators to require companies subject to their jurisdiction to provide comparable,comprehensive,and transparent financial reporting frameworks giving inter- national comparability. Instructions (a)What is the International Accounting Standards Board? (b)What stakeholders might benefit from the use of International Accounting Standards? (c)What do you believe are some of the major obstacles to harmonization? Professional Research:Financial Accounting and Reporting As a newly enrolled accounting major,you are anxious to better understand accounting institutions and sources of accounting literature.As a first step,you decide to explore the FASB's Statement of Financial Accounting Concepts No.1(CON 1). Instructions Using the Financial Accounting Research System (FARS),respond to the following items.(Provide text strings used in your search.) (a)Find Statement of Financial Accounting Concepts No.1.List three ways to access it on FARS. (b)According to CON 1,"...financial reporting includes not only financial statements but also other means of communicating information."What other means are there of communicating information? (c)According to CON 1,"...many people base economic decisions on their relationships to and knowl- edge about business enterprises and thus are potentially interested in the information provided by financial reporting."Indicate some of the users and the information they are most directly concerned with in economic decision making. Professional Simulation ⊕ In this simulation you are asked questions regarding accounting principles.Prepare response to all parts. s KWW_Professional_Simulation 口回8 Generally Accepted Time Remaining Accounting Principles 4 hours 30 minutes 閨回目®母4 Directiona SituationExplanation Resources At the completion of Bloom Company's audit,the president,Judy Bloom,asks about the meaning of the phrase"in conformity with generally accepted accounting principles"that appears in your audit report on the management's financial statements.Judy observes that the meaning of the phrase must include something more and different than what she thinks of as "principles." Directions SituationExplanation Resources (a)Explain the meaning of the term"accounting principles"as used in the audit report. (Do not discuss in this part the significance of "generally accepted.") (b)President Bloom wants to know how you determine whether or not an accounting principle is generally accepted.Discuss the sources of evidence for determining whether an accounting principle has substantial authoritative support.Do not merely list the titles of publications. kieso Remember to check the book's companion website to find additional resources for this chapter. o5-Rol 风
26 • Chapter 1 Financial Accounting and Accounting Standards 6 Failure of many stock exchanges and regulators to require companies subject to their jurisdiction to provide comparable, comprehensive, and transparent financial reporting frameworks giving international comparability. Instructions (a) What is the International Accounting Standards Board? (b) What stakeholders might benefit from the use of International Accounting Standards? (c) What do you believe are some of the major obstacles to harmonization? Professional Research: Financial Accounting and Reporting As a newly enrolled accounting major, you are anxious to better understand accounting institutions and sources of accounting literature. As a first step, you decide to explore the FASB’s Statement of Financial Accounting Concepts No. 1 (CON 1). Instructions Using the Financial Accounting Research System (FARS), respond to the following items. (Provide text strings used in your search.) (a) Find Statement of Financial Accounting Concepts No. 1. List three ways to access it on FARS. (b) According to CON 1, “…financial reporting includes not only financial statements but also other means of communicating information.” What other means are there of communicating information? (c) According to CON 1, “…many people base economic decisions on their relationships to and knowledge about business enterprises and thus are potentially interested in the information provided by financial reporting.” Indicate some of the users and the information they are most directly concerned with in economic decision making. Professional Simulation In this simulation you are asked questions regarding accounting principles. Prepare response to all parts. KWW_Professional _Simulation Generally Accepted Accounting Principles Time Remaining 4 hours 30 minutes © spliter done ? calculator sheet standards help At the completion of Bloom Company's audit, the president, Judy Bloom, asks about the meaning of the phrase “in conformity with generally accepted accounting principles” that appears in your audit report on the management's financial statements. Judy observes that the meaning of the phrase must include something more and different than what she thinks of as “principles.” (a) Explain the meaning of the term “accounting principles” as used in the audit report. (Do not discuss in this part the significance of “generally accepted.”) (b) President Bloom wants to know how you determine whether or not an accounting principle is generally accepted. Discuss the sources of evidence for determining whether an accounting principle has substantial authoritative support. Do not merely list the titles of publications. Directions Situation Explanation Resources Situation Explanation Resources copy paste Directions Remember to check the book’s companion website to find additional resources for this chapter. wi el moc. y c/ ollege/kieso 1460T_c01.qxd 12/8/05 09:05 am Page 26