Chapter 1 Course Notes

financial accountancy Theory and Analysis 10e Chapter 1 The using of accountancy Theory What is Theory? Webster defines theory as Systematic aloney make k forthwithledge, applic adequate to(p) in a relatively wide of the mark soma of mess a trunk of assumptions, veritable formulas and convenings of procedure to analyze, predict or a nonher(prenominal)wise explain the nature of behavior of a specified set of phenomena. why is the cultivation of a ecumenical theory of score main(prenominal)?The development of a general theory of chronicleing is because of the character reference be plays in our frugal society. We live in a capitalistic society which is characterized by a self-regulated merchandise that operates through the forces of supply and demand. What is the relationship of bill search to account theory? The goal of chronicle theory is to render a set of principles and relationships that explains observed blueprints and predicts unobserved coiffes.T hat is, invoice theory should be able to explain why companies elect sealed bill system methods everyplace former(a)s and should enable users to predict the attri thates of degenerates that elect various story methods. And as in other disciplines, chronicle theory should as well as be verifiable through accounting explore. account affirmation enquiry is consumeed to attain a more(prenominal) general theory of accounting, and in this regard the various theories of accounting that entertain been posited must(prenominal) be subjected to verification. The Early History of historyZenon Papyri * accounting records have been found to time back several thousand years in various break down of the world. Discovered in 1915, the Zenon Papyri contained in frame of referenceation Apollonius private estate for a fulfilment of nearly 30 years concerning construction projects, agricultural activities, and concern concern trading executions during the 3rd coulomb B. C . According to Hain, this surprisingly elaborate accounting system was use in Greece since the fi fth vitamin C B. C. Zenons accounting system contained nutrition for esponsibility accounting, a written record of all minutes, a personal account for wages paying(a) to employees, inventory records, and a record of plus acquisitions and disposals. In addition, at that place is evidence that all the accounts were audited. The Impact of the Renaissance * It wasnt until just about 1300-1500 the choose arose for more accurate records due to the Italians merchants vigoursly pursing trade and commerce. Italian merchants borrowed Arabic numeral system and the root of arithmetic and an evolving trend toward the consecrate duplicate entry sacred scripture keeping system developed. In 1494 an Italian monk, Fra Luca Pacioli, wrote a book on arithmetic that included a description of double-entry bookkeeping. Paciolis work, Summa de Arithmetica Geometria Proportioniet Proportionalita, did non fully describe double-entry bookkeeping rather, it formalized the exerts and ideas that had been evolving over the years. Double-entry bookkeeping enabled telephone circuit organizations to keep complete records of legal proceeding and ultimately resulted in the king to prep ar financial statements. The evolution of joint ventures into ongoing businessesAs ongoing business organizations replaced isolated ventures, it became necessary to develop accounting records and reports that deviseed a continuing enthronisation of capital employed in various ways and to periodically summate the results of activities. By the ni force outeenth century, bookkeeping expanded into accounting, and the concept that the owners original contri thoion, plus or minus profits or exhalationes, indicated net worth emerged. However, profit was considered an add-on in assets from any source, as the concepts of damage and income were yet to be developed.Another factor that influenced the devel opment of accounting during the cardinalth century was the evolution in England of joint ventures into business corporations. Under the incarnate form of business, owners ( extendholders) may not be concern. Thus many individuals, external to the business itself, needed information about the corporations activities. Moreover, owners and prospective owners wanted to evaluate whether line of descentholder enthronisations have yielded a return.As a consequence, the emerging conception of corporations created a need for periodic insurance coverage as well as a need to distinguish amid capital and income. The mend of the industrial revolution and the progressive movement The industrial revolution and the succession of the Companies seconds in England too increased the need for superior stock(a)s and controllers. In the later part of the nineteenth century, the industrial revolution arrived in the unify States, bringing the need for more formal accounting procedures and e xemplars. Railroads became a major economic influence.These companies created the need for promoteing industries, which in turn led to increases in the trade for corporate securities and an increased need for trained accountants as the separation of the management and ownership functions became more distinct. The concept of capital maintenance The major concern of accounting during the early 1900s was the development of a theory that could cope with corporate abuses that were occurring at that time, and capital maintenance emerged as a concept. This concept evolved from maintaining invested capital inviolate to maintaining the physical productive capacity of the firm to maintaining real capital.In essence, this last gull of capital maintenance was an extension of the economic concept of income (see Chapter 5) that there could be no increase in wealth unless the stockholder or the firm were better forth at the end of the period than at the beginning. The accountant as a protect or of business interests World War I changed the familiars attitude toward the business sector. Many people believed that the productive completion of the war could at least partially be attributed to the ingenuity of Ameri weed business. As a consequence, the earth perceived that business had improve and that external regulation was no unyieldinger necessary.The accountants role changed from protector of third parties to protector of business interests. Critics of accounting practice during the twenties suggested that accountants abdicated the stewardship role, placed in like manner much emphasis on the needs of management, and permitted too much flexibility in financial reporting. During this time financial statements were viewed as the re intromissions of management, and accountants did not have the ability to deal businesses to use accounting principles they did not wish to employ. The result of this attitude is well known. In 1929 the stock commercialise crashed and th e Great Depression ensued.Although accountants were not initially blamed for these crimsonts, the possibility of political intervention in the corporate sector loomed. Accounting in the United States since 1930 Meetings in the midst of big board and AIA one of the first attempts to improve accounting began in brief after the inception of the Great Depression with a series of meetings between representatives of the New York Stock veer (NYSE) and the American make up of Accountants. The purpose of these meetings was to plow hassles pertaining to the interests of investors, the NYSE, and accountants in the preparation of external financial statements.The cooperative appargonnt movements between the members of the NYSE and the AIA were well received. However, the post-Depression atmosphere in the United States was characterized by regulation. There was even legislation introduced that would have needed auditors to be licensed by the federal official government after passing a civil ser criminality examination. abdominal aortic aneurysm Similarly, in 1935 the American connectedness of University Instructors in Accounting changed its name to the American Accounting Association (AAA) and announced its intention to expand its activities in the research and development of accounting principles and threadb bes.The first result of these expanded activities was the publication, in 1936, of a brief report cautiously titled A Tentative line of reasoning of Accounting Principles Underlying Corporate financial Statements. The four-and-one-half-page document summarized the significant concepts primal financial statements at that time. entropy (Securities And sub Commission) Two of the most important pieces of legislation passed at this time were the Securities Act of 1933 and the Securities Exchange Act of 1934, which set up the Securities and Exchange Commission (SEC).The SEC was created to administer various securities acts. Under powers resultd by Congr ess, the SEC was given the potence to prescribe accounting principles and reporting practices. Nevertheless, because the SEC has acted as an overseer and allowed the private sector to develop accounting principles, this authority has seldom been used. However, the SEC has exerted pressure on the accounting handicraft and has been specially kindle in narrowing areas of remnant in accounting practice. * Securities Act of 1933A federal piece of legislation enacted as a result of the market crash of 1929. The legislation had devil main goals (1) to ensure more foil in financial statements so investors can make in create conclusions about investments, and (2) to throw laws a sop upst misrepresentation and fraudulent activities in the securities markets. * Securities Exchange Act of 1934 The Securities Exchange Act of 1934 was created to depart governance of securities transactions on the secondary market (after issue) and regulate the exchanges and broker-dealers in order to pro tect the investing public. commissioning on Accounting mapping The AICPAs Committee on Accounting Procedure ( hoodlum) was formed in 1936. The committee had authority to issue pronouncements on matters of accounting practice and procedure in order to anchor largely accepted practices. CAP was relatively in ready during its first two years, but became more active in receipt to the SECs release of ASR no 4. One of the first responses was to expand CAP membership from 7 to 21. Major concerns were * single- rated function of the historical address model of accounting.The then-accepted definition of assets as unamortized cost was seen by roughly critics as allowing management too much flexibility in deciding when to charge costs to expense. * The impact on inflation on reported profits. Lobbies were held by several companies in the 1940s for the use of hetero imposey cost depreciation. Both CAP and the SEC rejected the efforts. This decade long debate didnt until Congress passe d legislation in 1954 amending the IRS Tax regulation to allow accelerated depreciation. CAP works were originally published in the form of Accounting Research Bulletins (ARBs).The pronouncements did not dictate mandatory practice and received authority totally from their general bridal. The Accounting Research Bulletins were unite in 1953 into Accounting Terminology Bulletin no. 1, Review and lift out and ARB No 43 through 51 was published from 1953 until 1959. The recommendations of these bulletins that have not been superseded are contained in the FASB Accounting Standards Codifications. Accounting Principles batting order By 1959 the methods of formulating accounting principles were being questioned as not arising from research or ground on theory.The CAP was as well as criticized for acting in a in small stages fashion and issuing standards that, in many cases, were inconsistent. Additionally, all of its members were part-time and as a result their independence was que stioned. Finally, the fact that all of the CAP members were required to be AICPA members prevented many financial executives, investors, and schoolmans from service on the committee. As a result, accountants and financial statement users were calling for wider representation in the development of accounting principles.The AICPA responded to the alleged shortcomings of the CAP by forming the Accounting Principles Board (APB). The objectives of this trunk were to elicit the written expression of broadly accepted accounting principles (GAAP), to narrow areas of difference in remove practice, and to in the method of establishing accounting principles was cursorily subdue when the first APB chairman, Weldon Powell, voiced his belief that accounting research was more utilise and pure and that the usefulness of the end product was a major concern.The APB was smooth of from seventeen to 20-one members, who were selected primarily from the accounting profession but as well include d individuals from industry, government, and academia. Initially, the pronouncements of the APB, termed opinions, were not mandatory practice however, the issuance of APB ruling No. 2 (see FASB ASC 740-10-25 and 45) and a subsequent partial retraction contained in APB tactile sensation No. 4 (see FASB ASC 740-10-50) highlighted the need for standard- mountain groups to have more authority. Financial Accounting Standards BoardDue to the growing animadversion of the APB, in 1971 the board of directors of the AICPA appointed two committees. The chaff Committee, chaired by Francis pale yellow, was to study how financial accounting principles should be naturalised. The Trueblood Committee, chaired by Robert Trueblood, was asked to restrict the objectives of financial statements. The wheat berry Committee issued its report in 1972 recommending that the APB be abolished and the Financial Accounting Standards Board (FASB) be created. In contrast to the APB, whose members were all f rom the AICPA, this youthful board was to comprise representatives from various organizations.The members of the FASB were also to be full-time paid employees, unlike the APB members, who served part-time and were not paid. the Accounting Principles Board Formation and grammatical construction The APB was composed of from seventeen to twenty-one members, who were selected primarily from the accounting profession but also included individuals from industry, government, and academia. cases of pronouncements * APB Opinions Initially, the pronouncements of the APB, termed opinions, were not mandatory practice however, the issuance of APB Opinion No. 2 (see FASB ASC 740-10-25 and 45) and a subsequent partial retraction contained in APB Opinion No. (see FASB ASC 740-10-50) highlighted the need for standard-setting groups to have more authority. The flap over accounting for the investment valuate Credit This controversy was over the becoming method to use in accounting for the investme nt tax credit. In the early 1960s the country was suffering from the do of a recession. by and by President John F. Kennedy took office, his advisors suggested an innovative fiscal economic policy that affect a direct income tax credit (as opposed to a tax deduction) based on a percentage of the cost of a competent investment.Congress passed legislation creating the investment tax credit in 1961. The APB was then confront with deciding how companies should record and report the effects of the investment tax credit. It considered two alternative approaches 1. The flow-through method, which treated the tax credit as a s wish in income tax expense in the year it occurred. 2. The deferred method, which treated the tax credit as a reduction in the cost of the asset and therefore was reflected over the life of the asset through Rule 203The lack of support for some of the APBs pronouncements and concern over the formulation and acceptance of GAAP caused the Council of the AICPA to ado pt Rule 203 of the Code of headmaster Ethics. 10 This rule requires departures from accounting principles published in APB Opinions or Accounting Research Bulletins (or subsequently FASB Statements and now the FASB ASC) to be disclosed in footnotes to financial statements or in independent auditors reports when the effects of such(prenominal) departures are material.This action has had the effect of requiring companies and public accountants who deviate from authoritative pronouncements to justify such departures. Criticism of the APB 1. The independence of the members of the APB. The individuals serving on the board had full-time responsibilities elsewhere that capability influence their views of definite issues. 2. The structure of the board. The largest eight public accounting firms (at that time) were automatically awarded one member, and there were usually five or six other public accountants on the APB. 3. Response time.The emerging accounting problems were not being inve stigated and crystallized quickly enough by the part-time members. The financial Accounting Standards Board (FASB) The Wheat Committee The Wheat Committee, chaired by Francis Wheat, was to study how financial accounting principles should be established. The AICPA quickly adopted the Wheat Committee recommendations, and the FASB became the official proboscis aerated with issuing accounting standards. The Trueblood Committee The Trueblood Committee, chaired by Robert Trueblood, was asked to determine the objectives of fi nancial statements.The FASB was established The Wheat Committee issued its report in 1972 recommending that the APB be abolished and the Financial Accounting Standards Board (FASB) be created. The structure of the FASB The structure of the FASB is as follows. A board of trustees put up by organizations whose members have special knowledge and interest in financial reporting is selected. The organizations originally chosen to select the trustees were the American Ac counting Association the AICPA the Financial Executives land the National Association of Accountants (The NAAs ame was later changed to Institute of Management Accountants in 1991), and the Financial Analysts Federation. In 1997 the board of trustees added four members from public interest organizations. The board that governs the FASB is the Financial Accounting Foundation (FAF). The FAF appoints the Financial Accounting Standards Advisory Council (FASAC), which advises the FASB on major policy issues, the selection of lying-in forces, and the docket of topics. The enumerate of members on the FASAC varies from year to year. The bylaws call for at least twenty members to be appointed.However, the actual number of members has grown to about thirty in recent years to obtain representation from a wider group of interest parties. FASB Mission The FASBs mission is to establish and improve standards of financial accounting and reporting for the focusing and education of the public, including issuers, auditors, and users of financial information. In attempting to accomplish this mission, the FASB seeks to 1. mitigate the usefulness of financial reporting by focusing on the direct characteristics of relevance and reliability and on the qualities of comparing and consistency 2.Keep standards current to reflect changes in methods of doing business and changes in the economic environment 3. Consider forthwith any significant areas of deficiency in financial reporting that might be improved through the standard-setting process 4. Promote the international comparability of accounting standards concurrent with improving the quality of financial reporting 5. make better the common chthonianstanding of the nature and purposes of information contained in financial reports Type of Pronouncements * Statements of Financial Accounting Concepts Statements of Financial Accounting Standards * Interpretations * Technical Bullentins Originally, the FASB issued two types of pronouncements, Statements of Financial Accounting Standards (SFASs) and Interpretations. Subsequently, the FASB established two in the raw series of releases (1) Statements of Financial Accounting Concepts (SFACs) and (2) Technical Bulletins. SFASs conveyed required accounting methods and procedures for specific accounting issues and officially created GAAP. Interpretations were modifications or extensions of issues pronouncements.SFACs are mean to establish the objectives and concepts that the FASB will use in exploitation standards of financial accounting and reporting. To term, the FASB has issued seven SFACs, which are talk ofed in depth in Chapters 2, 6, and 7. SFACs differed from Statements of Financial Accounting Standards in that they did not establish GAAP. Similarly, they are not intended to invoke Rule 203 of the Rules of Conduct of the Code of Professional Ethics. It is anticipate that the major beneficiary of these SFACs will be the FASB itself.However, knowledge of the objectives and concepts the board uses should enable financial statement users to better understand the content and limitations of financial accounting information. Technical Bulletins were strictly interpretive in nature and did not establish rising standards or amend existing standards. They were intended to provide guidance on financial accounting and reporting problems on a timely basis. Emerging Issues One of the fi rst criticisms of the FASB was for failing to provide timely guidance on emerging carrying out and practice problems.During 1984 the FASB responded to this criticism by (1) establishing a task force, the Emerging Issues Task Force (EITF), to supporter in identifying issues and problems that might require action and (2) expanding the scope of the FASB Technical Bulletins in an effort to offer fast guidance on a wider anatomy of issues. The EITF was formed in response to two confl icting issues. On the one hand, accountants are go about with a variety o f issues that are not fully turn to in accounting pronouncements, such as interest rate swaps or new fi nancial instruments. These and other new issues need immediate resolution.On the other hand, many accountants maintain that the ever-increasing body of professional pronouncements has created a standards overload problem (discussed in more detail below). The FASB established the EITF in an attempt to at the same time address both issues. The goal of the EITF is to provide timely guidance on new issues while limiting the number of issues whose resolutions require formal pronouncements by the FASB. Standards Overload One of the fi rst criticisms of the FASB was for failing to provide timely guidance on emerging implementation and practice problems.During 1984 the FASB responded to this criticism by (1) establishing a task force, the Emerging Issues Task Force (EITF), to assist in identifying issues and problems that might require action and (2) expanding the scope of the FASB Tech nical Bulletins in an effort to offer quicker guidance on a wider variety of issues. The EITF was formed in response to two confl icting issues. On the one hand, accountants are manifestationd with a variety of issues that are not fully addressed in accounting pronouncements, such as interest rate swaps or new fi nancial instruments.These and other new issues need immediate resolution. On the other hand, many accountants maintain that the ever-increasing body of professional pronouncements has created a standards overload problem (discussed in more detail below). The FASB established the EITF in an attempt to simultaneously address both issues. The goal of the EITF is to provide timely guidance on new issues while limiting the number of issues whose resolutions require formal pronouncements by the FASB. Standard setting as a political processA highly infl uential academic accountant give tongue to that accounting standards are as much a product of political action as they are of c areful logic or empirical fi ndings. 15 This phenomenon exists because a variety of parties are interested in and bear on by the development of accounting standards. Various users of accounting information have found that the best way to infl uence the formulation of accounting standards is to attempt to infl uence the standard setters. The CAP, APB, and FASB have all come under a great deal of pressure to develop or amend standards so as to benefi t a bad-tempered user group.For example, the APB had originally intended to develop a comprehensive theory of accounting before attempting to solve any current problems however, this approach was abandoned when it was determined that such an effort might take up to fi ve years and that the SEC would not stay that long before taking action. The Business Roundtable engaged in what initially was a successful effort (later reversed) to increase the required consensus for transition of a SFAS from a simple majority to fi ve of the seven m embers of the FASB.Congressional action was exist over the FASBs proposed elimination of the pooling of interest method of accounting for business combinations (see Chapter 16). Two of the most notable examples of the politicizing of accounting standards involved the issues of employee stock options and dependable judge accounting. Economic Consequences The increased pressure on the standard-setting process is not surprising, considering that many accounting standards have signifi cant economic consequences. Economic consequences refers to the impact of accounting reports on various segments of our economic society.This concept holds that the accounting practices a ships social club adopts affect its security price and value. Consequently, the choice of accounting methods infl uences decision making rather than just refl ecting the results of these decisions. Consider the release of the FASBs pronouncement on other postretirement benefi ts (OPRBs) FASB Statement No. 106, Other Post privacy Benefi ts (see FASB ASC 715-10-30, 60, and 80). The accounting guidelines for OPRBs required companies to change from a pay-as-you-go basis to an accrual basis for health care and other benefi ts that companies provide to retirees and their dependents.The accrual basis requires companies to invoice the obligation to provide future services and accrue these costs during the years employees provide service. This change in accounting caused a large increase in recorded expenses for many companies. Consequently, a number of companies simply ceased providing such benefi ts to their employees, at a large social cost. The impact on our economic society of accounting for OPRBs illustrates the need for the FASB to fully consider both the emergency to yet develop sound reporting practices and the possible economic consequences of new codifi cation content.Accounting standard setting does not exist in a vacuum. It cannot be completely insulated from political pressures, nor ca n it avoid carefully evaluating the possible ramifi cations of standard setting. gaap Evolution of phrase * Changed wording of auditors corroboration brought about by meetings between NYSE and AIA One result of the meetings between the AICPA and members of the NYSE following the onset of the Great Depression was a rescript in the wording of the certifi cate issued by CPAs. The opinion paragraph formerly stated that the fi nancial statements had been examined and were accurate.The terminology was changed to say that the statements are fairly presented in accordance with generally accepted accounting principles. This expression is now interpreted as comprehend the conventions, rules, and procedures that are necessary to explain accepted accounting practice at a given time. Therefore fi nancial statements are fair only to the expiration that the principles are fair and the statements comply with the principles. * The APBs definition * The Auditing Standards Executive Committees de finition The current sources of GAAP consist of four levels describe as A, B, C, and D by Statement of Auditing Standards No 69 he business reporting research project Steering Committee running(a) Group the role of ethics in accounting Ethics are concerned with the types of behavior society considers right and wrong. Accounting ethics integrate social standards of behavior as well as behavioral standards that rival specifi cally to the profession. The environment of public accounting has become ethically complex. The accountants Code of Professional Ethics developed by the AICPA has evolved over time, and as business transactions have become more and more complex, ethical issues have also become more complex.Accounting in Crisis the events of the early 2000s On January 1, 2001, Enrons stock was selling for over $90 per share. From that time until the early summer of 2001, nineteen investment research fi rms reviewed its performance and twelve had given it a powerful buy recomme ndation, while fi ve others had recommended it as buy. 27 Additionally, the companys 2000 yearbook report indicated that its auditor had not found any signifi cant accounting problems. However, on August 14, 2001, it was announced that the companys president, Jeffery Skilling, had resigned after only six months on the job for purely personal reasons. Enron used what were termed special-purpose entities (SPEs) now termed variable interest entities ( postulates) to access capital and hedge risk. 28 By using SPEs such as limited partnerships with outside parties, a company may be permitted to increase its fi nancial leverage and return on assets without reporting debt on its balance sheet. 29 The arrangement works as follows An entity contributes fi xed assets and colligate debt to an SPE in exchange for an ownership interest.The SPE then borrows large sums of money from a fi nancial institution to purchase assets or conduct other business without the debt or assets showing up on the originating companys fi nancial statements. The originating company can also sell leveraged assets to the SPE and record a profi t. At the time these transactions took place, the FASB required that only 3 percent of a SPE be have by an outside investor. If this guideline is met, the SPE didnt need to be unify and the SPEs debt was not disclosed on the originating companys fi nancial statements.Enron used SPEs to new degrees of complexity and sophistication, capitalizing them with not only a variety of fi xed assets and liabilities but also extremely complex derivative fi nancial instruments, its own restricted stock, rights to baffle its stock, and related liabilities. Additionally, as Enrons fi nancial dealings became more complicated, the company patently also conductred troubled assets that were falling in value, such as certain overseas energy facilities, its broadband operation, or stock in companies that had been spun off to the SPEs. As a consequence, the losses on thes e assets were kept off Enrons books.To compensate partnership investors for assuming downside risk, Enron promised to issue additional shares of its stock. As the value of the assets in these partnerships fell, Enron began to incur larger and larger obligations to issue its own stock farther down the road. The problem was later compounded as the value of Enrons stock declined. On October 16, 2001, the company reported a third-quarter loss and its stock dropped to about $33 a share. On October 28, as some of the problems with the SPEs were made public, a special committee of the board of directors of Enron was established under the chairmanship of William C.Powers, dean of the University of Texas Law School. The Powers Committee Report concluded that some Enron employees were straightaway involved in the SPEs and were enriched by tens of millions of dollars they never should have received. The committee also found that many of the transactions were designed to achieve favorable fi n ancial statement results and were not based on legitimate economic objectives or to transfer risk. International Accounting standards A truly global economy emerged during the 1990s, as many U. S. companies generated signifi cant amounts of revenue and profi ts in foreign markets.Multinational companies are faced with decisions on the allocation of resources to their most effi cient uses. These allocations cannot be accomplished without accurate and accepted fi nancial information. Companies seeking capital or investment opportunities across national boundaries face cost and time issues. Capitalseeking fi rms must reconcile their fi nancial statements to the accounting rules of the nation in which they are seeking capital, and investors must identify foreign reporting differences. The more and more global economy requires that this process be simplifi ed.Thus there is a publicize to chord international accounting standards. The IASB is an independent private sector body that was formed in 1973 to achieve this purpose. Its objectives are 1. To formulate and publish in the public interest accounting standards to be observed in the presentation of fi nancial statements and to promote their worldwide acceptance and observance 2. To work generally for the approach and harmonization of regulations, accounting standards, and procedures relating to the presentation of fi nancial statements33These objectives have resulted in attempts to coordinate and harmonize the activities of the many countries and agencies engaged in setting accounting standards. The IASB standards also provide a useful starting point for developing countries wishing to establish accounting standards. 34 The IASB has also developed a conceptual poser titled the Framework for the Preparation and Presentation of Financial Statements. 35 The conclusions articulate in this release are similar to those contained in the FASBs abstract Framework Project.That is, the objective of fi nancial statem ents is to provide useful information to a wide range of users for decision-making purposes. The information provided should contain the qualitative characteristics of relevance, reliability, comparability, and understandability. At the time this book was published, the IASB had issued forty-one Statements of Accounting Standards (IASs) and ten Statements of Financial Reporting Standards (IFRSs). However, since it has no enforcement authority, the IASB must rely on the best endeavors of its members.Neither the FASB nor the SEC is a member of the IASB, so its standards have no authority in the United States at the present time. However, the SEC recently ruled that foreign companies that adopt IASB standards are entitled to list their securities for sale on U. S. stock exchanges (see Chapter 3 for a further discussion of this issue). As noted in Chapters 2 and 3, there is also a movement to have IASB standards become GAAP for U. S. companies. The emergence of transnational corporatio ns has resulted in a need for the increased harmonization of worldwide accounting standards.The role of the IASB is discussed in more detail in Chapter 3, and the IASB standards are reviewed throughout this text in chapters dealing with the issues addressed by each IAS or IFRS. object lessons skid 1-1 Sources of GAAP The FASB ASC is now the sole authoritative source for all U. S. GAAP. a. What are the major goals of the FASB ASC? b. How is the FASB ASC expected to improve the practice of accounting? c. What books is now contained in the FASB ASC? d. What should an accountant do if the guidance for a particular transaction or event is not specifi ed within the FASB ASC? Case 1-2 Accounting EthicsWhen the FASB issues new standards, the implementation date is frequently 12 months from date of issuance, and early implementation is encouraged. Becky Hoger, controller, discusses with her fi nancial vice president the need for early implementation of a standard that would result in a fairer presentation of the companys fi nancial condition and earnings. When the fi nancial vice president determines that early implementation of the standard will adversely affect the reported net income for the year, he discourages Hoger from implementing the standard until it is required. ask a. What, if any, ethical issue is involved in this case? . Is the fi nancial vice president acting improperly or immorally? c. What does Hoger have to gain by advocacy of early implementation? d. Who might be affected by the decision against early implementation? (CMA adapted) Case 1-3 Politicalization of Accounting Standards or so accountants have said that politicalization in the development and acceptance of generally accepted accounting principles (i. e. , standard setting) is taking place. Some use the term politicalization in a narrow sense to mean the infl uence by governmental agencies, curiously the SEC, on the development of generally accepted accounting principles.Others use i t more broadly to mean the compromising that takes place in bodies responsible for developing these principles because of the infl uence and pressure of interested groups (SEC, American Accounting Association, businesses through their various organizations, Institute of Management Accountants, fi nancial analysts, bankers, lawyers, etc. ). Required 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 fi rst two indicate an increasing politicalization (as the term is used in the broad sense) of accounting standard setting? excuse your answer by indicating how the CAP, APB, and FASB operated or operate. Cite specifi c developments t hat tend to support your answer. b. What arguments can be raised to support the politicalization of accounting standard setting? . What arguments can be raised against the politicalization of accounting standard setting? (CMA adapted) Case 1-4 Generally Accepted Accounting Principles At the completion of the Darby Department breed audit, the president asks about the meaning of the phrase in conformity with generally accepted accounting principles, which appears in your audit report on the managements fi nancial statements. He observes that the meaning of the phrase must include more than what he thinks of as principles. Required a.Explain the meaning of the term accounting principles as used in the audit report. (Do not in this part discuss the signifi cance of generally accepted. ) b. The president wants to know how you determine whether or not an accounting principle is generally accepted. Discuss the sources of evidence for find out whether an accounting principle has substan tial authoritative support. c. The president believes that diversity in accounting practice will always exist among independent entities despite continual improvements in comparability.Discuss the arguments that support his belief. Case 1-5 The Evolution of the Accounting Profession The nineteenth century witnessed the evolution of joint ventures into business corporations. Required Discuss how the emergence and egress of the corporate form of business affected perceptions regarding the role of the accounting profession in fi nancial reporting in England and the United States. Case 1-6 Accounting in Crisis During the early 2000s, the role of accounting and the auditing profession changed and several accounting scandals were uncovered. Required a.What conditions caused accounting and the auditing profession role to change during this time? b. What major changes occurred as a result of the accounting scandals at that time? Case 1-7 The FASB The FASB is the offi cial body charged w ith issuing accounting standards. Required a. Discuss the structure of the FASB. b. How are the Financial Accounting Foundation members nominated? c. SFAC No. 2 describes a number of key characteristics or qualities for accounting information. Briefl y discuss the importance of any three of these qualities for fi nancial reporting purposes. CMA adapted) FASB ASC Research For each of the following research cases, search the FASB ASC database for information to address the issues. Cut and paste the FASB ASC paragraphs that support your responses. so summarize briefl y what your responses are, citing the paragraphs used to support your responses. FASB ASC 1-1 Variable Interest Entities In this chapter, we discuss how Enron and other companies use Variable Interest Entities (VIEs) to keep the effects of transactions and events off corporate balance sheets. 1. How does the FASB defi ne a VIE?In other words, how does an entity qualify to be a VIE? 2. Is a company that meets the defi ni tion of a VIE required to consolidate the VIE? FASB ASC 1-2 attitude of Accounting Research Bulletins Portions of ARB No. 43 are whitewash considered GAAP. Three of the most important issues covered in ARB No. 43 are revenue recognition, treasury stock, and comparative fi nancial statements. Find the appropriate sections of the FASB ASC, originally contained in ARB No. 43, that address these issues. Cite the sources and reduplicate the relevant information. FASB ASC 1-3 Accounting for the Investment Tax CreditThe accounting alternative treatments for the investment tax credit originally outlined in APB Opinions 2 and 4 are still considered GAAP. Find and cite the FASB ASC paragraphs and copy the relevant information. FASB ASC 1-4 Securities and Exchange Commission Comments SEC percipients frequently provide comments at EITF meetings. Find, cite, and copy the observer comments on 1. Revenue recognitioncustomer payments and incentives 2. Debt with conversions and other options 3. Software cost of sales and services FASB ASC 1-5 Generally Accepted Accounting Procedure GuidelinesFind the guidelines for determining GAAP in the FASB ASC. Room for pass on reason 1-1 Which Body Should localize Accounting Standards in the United States? team Debate Team 1 implore that the SEC should set accounting standards in the United States. Team 2 Argue that the FASB should set accounting standards in the United States. Debate 1-2 Should the Scope of Accounting Standards Be Narrowed Further? Team Debate Team 1 Pretend you are management. Argue against the narrowing of accounting choices. Team 2 Pretend you are a prospective investor. Argue for the narrowing of accounting choices.