CHAPTER 1

Financial Accounting and Accounting Standards

ASSIGNMENT CLASSIFICATION TABLE

Questions Cases

Topics 1. 2. 3. 4. . !. ". '. Subject matter of accounting. Environment of accounting. Role of principles, objectives, standards, and accounting theory. #istorical development of $%%&. %uthoritative pronouncements and rule* ma+ing bodies. Role of pressure groups. ,nternational accounting. Ethical issues.

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ASSIGNMENT CHARACTERISTICS TABLE

Item CA1-1 CA1-2 CA1-" CA1-$ CA1-! CA1-* CA1-+ CA1-. CA1-/ CA1-10 CA1-11 CA1-12 CA1-1" CA1-1$ CA1-1! CA1-1* CA1-1+

Description Financial accounting. Objectives of financial reporting. Accounting numbers and t#e environment. %eed for &AA'. A(C'A%s role in rule ma)ing. 6%S; role in rule ma+ing. 'oliticali,ation of &AA'. Models for setting &AA'. &AA' terminolog0. Accounting organi,ations and documents issued. Accounting pronouncements. 1ule-ma)ing (ssues. Securities and 2-c#ange Commission. 1ule ma)ing process. Financial reporting pressures. 2conomic conse3uences. &AA' and economic conse3uences.

Level o Di ic!lt"

Time #min!tes$ 1 :2) 20 2! 10 1! 1! 20 20 2! 20 2! "0 $0 1! 20 "0 $0 1! 20 10 1! 20 2! "0 $0 2! "! 2! "! 2! "! 2! "!

Simple Moderate Simple Simple Simple Simple CompleSimple Moderate Simple Simple CompleModerate Moderate Moderate Moderate Moderate

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SOLUTIONS TO CODIFICATION EXERCISES

CE1&1
<here is no ans=er to this re>uirement as it as+s the student to register to use the -odification.

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CE1-2
5a9 <he -odification 8vervie= module illustrates three items 519 the topic structure 529 different methods of accessing and vie=ing content, and 539 a summary of the uni>ue features of the -odification Research System.

5b9 <he -odification is intended to 519 become the single source of 7.S. accounting standards and 529 supersede all of the non*SE- documents used to populate the -odification.

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<he ?0hat@s Ae=B page provides lin+s to -odification content that has been recently issued. Curing the verification phase, updates may result from either the issuance of -odification update instructions that accompany ne= Standards or from changes to the -odification due to incorporation of constituent feedbac+.

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ANS'ERS TO ()ESTIONS
1. 6inancial accounting measures, classifies, and summariDes in report form those activities and that information =hich relate to the enterprise as a =hole for use by parties both internal and eEternal to a business enterprise. 4anagerial accounting also measures, classifies, and summariDes in report form enterprise activities, but the communication is for the use of internal, managerial parties, and relates more to subsystems of the entity. 4anagerial accounting is management decision oriented and directed more to=ard product line, division, and profit center reporting. 2. 6inancial statements generally refer to the four basic financial statementsF balance sheet, income statement, statement of cash flo=s, and statement of changes in o=ners@ or stoc+holders@ e>uity. 6inancial reporting is a broader conceptG it includes the basic financial statements and any other means of communicating financial and economic data to interested eEternal parties. EEamples of financial reporting other than financial statements are annual reports, prospectuses, reports filed =ith the government, ne=s releases, management forecasts or plans, and descriptions of an enterprise@s social or environmental impact. 3. ,f a company@s financial performance is measured accurately, fairly, and on a timely basis, the right managers and companies are able to attract investment capital. <o provide unreliable and irrelevant information leads to poor capital allocation =hich adversely affects the securities mar+et. 4. Some major challenges facing the accounting profession relate to the follo=ing itemsF Aonfinancial measurementHho= to report significant +ey performance measurements such as customer satisfaction indeEes, bac+log information and reject rates on goods purchased. 6or=ard*loo+ing informationHho= to report more future oriented information. Soft assetsHho= to report on intangible assets, such as mar+et +no=*ho=, mar+et dominance, and =ell* trained employees. <imelinessHho= to report more real*time information. 5. ,n general, the objectives of financial reporting are to provide 519 information that is useful in investment and credit decisions, 529 information that is useful in assessing cash flo= prospects, and 539 information about enterprise resources, claims to those resources, and changes in them. 4ore specifically these objectives state that financial reporting should provide informationF a. that is useful to present and potential investors and creditors and other users in ma+ing rational investment, credit, and similar decisions. <he information should be comprehensible to those =ho have a reasonable understanding of business and economic activities and are =illing to study the information =ith reasonable diligence. b. to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securities or loans. Since investors and creditors@ cash flo=s are related to enterprise cash flo=s, financial reporting should provide information to help investors, creditors, and other users assess the amounts, timing, and uncertainty of prospective net cash inflo=s to the related enterprise. c. about the economic resources of an enterprise, the claims to those resources 5obligations of the enterprise to transfer resources to other entities9, o=ners@ e>uity, and the effects of transactions, events, and circumstances that change its resources and claims to those resources. . % common set of standards applied by all businesses and entities provides financial statements =hich are reasonably comparable. 0ithout a common set of standards, each enterprise could, and =ould, develop its o=n theory structure and set of practices, resulting in noncomparability among enterprises.

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Questions C!a"te# 1 5-ontinued9 $. $eneral*purpose financial statements are not li+ely to satisfy the specific needs of all interested parties. Since the needs of interested parties such as creditors, managers, o=ners, governmental agencies, and financial analysts vary considerably, it is unli+ely that one set of financial statements is e>ually appropriate for these varied uses. %. <he SE- has the po=er to prescribe, in =hatever detail it desires, the accounting practices and principles to be employed by the companies that fall =ithin its jurisdiction. ;ecause the SE- receives audited financial statements from nearly all companies that issue securities to the public or are listed on the stoc+ eEchanges, it is greatly interested in the content, accuracy, and credibility of the statements. 6or many years the SE- relied on the %,-&% to regulate the profession and develop and enforce accounting principles. Iately, the SE- has assumed a more active role in the develop*ment of accounting standards, especially in the area of disclosure re>uirements. ,n Cecember 1("3, in %SR Ao. 1 ), the SE- said the 6%S;@s statements =ould be presumed to carry substantial authoritative support and anything contrary to them to lac+ such support. ,t thereby supports the development of accounting principles in the private sector. &. <he -ommittee on %ccounting &rocedure =as a special committee of the %merican ,nstitute of -&%s that, bet=een the years of 1(3( and 1( (, issued 1 A''ountin( Resea#'! )u**etins dealing =ith a =ide variety of timely accounting problems. <hese bulletins provided solutions to immediate problems and narro=ed the range of alternative practices. ;ut, the -ommittee@s problem*by*problem approach failed to provide a =ell*defined and =ell*structured body of accounting theory that =as so badly needed. <he -ommittee on %ccounting &rocedure =as replaced in 1( ( by the %ccounting &rinciples ;oard. 1+. <he creation of the %ccounting &rinciples ;oard =as intended to advance the =ritten eEpression of accounting principles, to determine appropriate practices, and to narro= the differences and inconsistencies in practice. <o achieve its basic objectives, its mission =as to develop an overall conceptual frame=or+ to assist in the resolution of problems as they became evident and to do substantive research on individual issues before pronouncements =ere issued. 11. A''ountin( Resea#'! )u**etins =ere pronouncements on accounting practice issued by the -ommittee on %ccounting &rocedure bet=een 1(3( and 1( (G since 1(!4 they have been recogniDed as accepted accounting practice unless superseded in part or in =hole by an opinion of the %&; or an 6%S; standard. A,) O"inions =ere issued by the %ccounting &rinciples ;oard during the years 1( ( through 1("3 and, unless superseded by 6%S; Statements, are recogniDed as accepted practice and constitute the re>uirements to be follo=ed by all business enterprises. FAS) State-ents are pronouncements of the 6inancial %ccounting Standards ;oard and currently represent the accounting profession@s authoritative pronouncements on financial accounting and reporting practices. 12. <he eEplanation should note that generally accepted accounting principles or standards have ?substantial authoritative support.B <hey consist of accounting practices, procedures, theories, concepts, and methods =hich are recogniDed by a large majority of practicing accountants as =ell as other members of the business and financial community. ;ulletins issued by the -ommittee on %ccounting &rocedure, opinions rendered by the %ccounting &rinciples ;oard, and statements issued by the 6inancial %ccounting Standards ;oard constitute ?substantial authoritative support.B 13. ,t =as believed that 6%S; Statements =ould carry greater =eight than %&; 8pinions because of significant differences bet=een the 6%S; and the %&;, namelyF 519 <he 6%S; has a smaller membership of full*time compensated membersG 529 the 6%S; has greater autonomy and increased independenceG and 539 the 6%S; has broader representation than the %&;.

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Questions C!a"te# 1 5-ontinued9 14. <he technical staff of the 6%S; conducts research on an identified accounting topic and prepares a ?preliminary vie=sB that is released by the ;oard for public reaction. <he ;oard analyDes and evaluates the public response to the preliminary vie=s, deliberates on the issues, and issues an ?eEposure draftB for public comment. <he preliminary vie=s merely presents all facts and alternatives related to a specific topic or problem, =hereas the eEposure draft is a tentative ?statement.B %fter studying the public@s reaction to the eEposure draft, the ;oard may reevaluate its position, revise the draft, and vote on the issuance of a final statement. 15. Statements of financial accounting stan.a#.s constitute generally accepted accounting principles and dictate acceptable financial accounting and reporting practices as promulgated by the 6%S;. <he first standards statement =as issued by the 6%S; in 1("3. Statements of financial accounting 'on'e"ts do not establish generally accepted accounting principles. Rather, the concepts statements set forth fundamental objectives and concepts that the 6%S; intends to use as a basis for developing future standards. <he concepts serve as guidelines in solving eEisting and emerging accounting problems in a consistent, sound manner. ;oth the standards statements and the concepts statements may develop through the same process from discussion memorandum, to eEposure draft, to a final approved statement. 1 . Rule 2)3 of the -ode of &rofessional -onduct prohibits a member of the %,-&% from eEpressing an opinion that financial statements conform =ith $%%& if those statements contain a material departure from an accounting principle promulgated by the 6%S;, or its predecessors, the %&; and the -%&, unless the member can demonstrate that because of unusual circumstances the financial statements =ould other=ise have been misleading. 6ailure to follo= Rule 2)3 can lead to a loss of a -&%@s license to practice. <his rule is eEtremely important because it re>uires auditors to follo= 6%S; standards. 1$. 6%S; Standards, 6%S; <echnical ;ulletins, %,-&% &ractice ;ulletins. 1%. <he chairman of the 6%S; =as indicating that too much attention is put on the bottom line and not enough on the development of >uality products. 4anagers should be less concerned =ith short*term results and be more concerned =ith the long*term results. ,n addition, short*term taE benefits often lead to long*term problems. <he second part of his comment relates to accountants being overly concerned =ith follo=ing a set of rules, so that if litigation ensues, they =ill be able to argue that they follo=ed the rules eEactly. <he problem =ith this approach is that accountants =ant more and more rules =ith less reliance on professional judgment. Iess professional judgment leads to inappropriate use of accounting procedures in difficult situations. ,n the accountants@ defense, recent legal decisions have imposed vast ne= liability on accountants. <he concept of accountant@s liability that has emerged in these cases is broad and eEpansiveG the number of classes of people to =hom the accountant is held responsible are almost limitless. 1&. 6%S; Staff &ositions 56S&9 are used to provide interpretive guidance and to ma+e minor amend ments to eEisting standards. <he due process used to issue a 6S& is the same used to issue a ne= standard.

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Questions C!a"te# 1 5-ontinued9 2+. <he Emerging ,ssues <as+ 6orce often arrives at consensus conclusions on certain financial reporting issues. <hese consensus conclusions are then loo+ed upon as $%%& by practitioners because the SE- has indicated that it =ill vie= consensus solutions as preferred accounting and =ill re>uire persuasive justification for departing from them. <hus, at least for public companies =hich are subject to SE- oversight, consensus solutions developed by the Emerging ,ssues <as+ 6orce are follo=ed unless subse>uently overturned by the 6%S;. ,t should be noted that the 6%S; too+ greater direct o=nership of $%%& established by the E,<6 by re>uiring that consensus positions be ratified by the 6%S;. 21. <he 6inancial %ccounting Standards ;oard %ccounting Standards -odification 5-odifications9 is a compilation of all $%%& in one place. ,ts purpose is to integrate and synthesiDe eEisting $%%& and not to create ne= $%%&. ,t creates one level of $%%& =hich is considered authoritative. <he 6%S; -odification Research Systems 5-RS9 is an*on*line real time data base =hich provides easy access to the -odification. <he -odification and the related -RS provide a topically organiDed structure =hich is subdivided into topic, subtopics, sections, and paragraphs. 22. #opefully, the codification =ill help users to better understand =hat $%%& is. ,f this occurs, the rash of noncompliance =ith $%%& =ill be reduced and the time to research accounting issues =ill be substantially reduced. ,n addition, through the electronic =eb*based format, $%%& can be easily updated =hich =ill help users stay current. 23. <he sources of pressure are innumerable, but the most intense and continuous pressure to change or influence accounting principles or standards come from individual companies, industry associations, governmental agencies, practicing accountants, academicians, professional accoun*ting organiDations, and public opinion. 24. Economic conse>uences means the impact of accounting reports on the =ealth positions of issuers and users of financial information and the decision*ma+ing behavior resulting from that impact. ,n other =ords, accounting information impacts various users in many different =ays =hich leads to =ealth transfers among these various groups. ,f politics plays an important role in the development of accounting rules, the rules =ill be subject to manipulation for the purpose of furthering =hatever policy prevails at the moment. Ao matter ho= =ell intentioned the rule ma+er may be, if information is designed to indicate that investing in a particular enterprise involves less ris+ than it actually does, or is designed to encourage invest ment in a particular segment of the economy, financial reporting =ill suffer an irreplaceable loss of credibility. 25. Ao one particular proposal is eEpected in ans=er to this >uestion. <he students@ proposals, ho=ever, should be defensible relative to the follo=ing criteriaF 519 <he method must be efficient, responsive, and eEpeditious. 529 <he method must be free of bias and be above or insulated from pressure groups. 539 <he method must command =idespread support if it does not have legislative authority. 549 <he method must produce sound yet practical accounting principles or standards. <he students@ proposals might ta+e the form of alterations of the eEisting methodology, an accoun*ting court 5as proposed by Ieonard Space+9, or governmental device. 2 . -oncern eEists about fraudulent financial reporting because it can undermine the entire financial reporting process. 6ailure to provide information to users that is accurate can lead to inappropriate allocations of resources in our economy. ,n addition, failure to detect massive fraud can lead to additional governmental oversight of the accounting profession.

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Questions C!a"te# 1 5-ontinued9 2$. <he eEpectations gap is the difference bet=een =hat people thin+ accountants should be doing and =hat accountants thin+ they can do. ,t is a difficult gap to close. <he accounting profession recogniDes it must play an important role in narro=ing this gap. <o meet the needs of society, the profession is continuing its efforts in developing accounting standards, such as numerous pronouncements issued by the 6%S;, to serve as guidelines for recording and processing business transactions in the changing economic environment.

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2%. <he follo=ing are some of the +ey provisions of the Sarbanes*8Eley %ctF J Establishes an oversight board for accounting practices. <he &ublic -ompany %ccounting 8ver*sight ;oard 5&-%8;9 has oversight and enforcement authority and establishes auditing, >uality control, and independence standards and rules. J ,mplements stronger independence rules for auditors. %udit partners, for eEample, are re>uired to rotate every five years and auditors are prohibited from offering certain types of consulting services to corporate clients. J Re>uires -E8s and -68s to personally certify that financial statements and disclosures are accurate and complete and re>uires -E8s and -68s to forfeit bonuses and profits =hen there is an accounting restatement. J Re>uires audit committees to be comprised of independent members and members =ith finan*cial eEpertise. J Re>uires codes of ethics for senior financial officers. ,n addition, Section 4)4 of the Sarbanes*8Eley %ct re>uires public companies to attest to the effectiveness of their internal controls over financial reporting. 2&. %ccountants must perceive the moral dimensions of some situations because $%%& does not define or cover all specific features that are to be reported in financial statements. ,n these instances accountants must choose among alternatives. <hese accounting choices influence =hether particular sta+eholders may be harmed or benefited. 4oral decision*ma+ing involves a=areness of potential harm or benefit and ta+ing responsibility for the choices. 3+. Some of the reasons for differences areF 519 <he objectives of financial reporting are often different in foreign countries. 529 <he institutional structures are often not comparable. 539 Strong national tendencies are pervasive and therefore there is reluctance to adopt any one country@s approach. 31. Relevant and reliable financial information is a necessity for viable capital mar+ets. 7nfortunately, financial statements from companies outside the 7nited States are often prepared using different principles than 7.S. $%%&. %s a result, international companies have to develop financial information in different =ays. ;eyond the additional costs these companies incur, users of financial statements are often forced to understand at least t=o sets of $%%&. ,t is not surprising that there is a gro=ing demand for one set of high >uality international standards. 32. &rinciples*based rules are considered to be based on accounting principles to result in financial statements that are presented. Rules*based standards are generally >uite detailed, and in many instances follo= a ?chec+*boEB mentality that some contend may shield auditors and companies from legal liability. ;ecause i$%%& tends to be simpler and less stringent in its accounting and disclosure re>uirements, it is generally considered more principles*based than 7.S. $%%&.

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TI/E AND ,UR,OSE OF CONCE,TS FOR ANAL0SIS

CA 1-1 5<ime 1 :2) minutes9 &urposeHto provide the student =ith an opportunity to distinguish bet=een financial accounting and managerial accounting, identify major financial statements, and differentiate financial statements and financial reporting. CA 1-2 5<ime 2):2 minutes9

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&urposeHto provide the student =ith an opportunity to eEplain the basic objectives of financial reporting. CA 1-3 5<ime 1):1 minutes9 &urposeHto provide the student =ith an opportunity to describe ho= reported accounting numbers might affect an individual@s perceptions and actions.

CA 1-4 5<ime 1 :2) minutes9 &urposeHto provide the student =ith an opportunity to evaluate the vie=point of removing mandatory accounting rules and allo=ing each company to voluntarily disclose the information it desired. CA 1-5 5<ime 2):2 minutes9

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&urposeHto provide the student =ith an opportunity to eEplain the evolution of accounting rule*ma+ing organiDations and the role of the %,-&% in the rule ma+ing environment. CA 15<ime 2):2 minutes9

&urposeHto provide the student =ith an opportunity to identify the sponsoring organiDation of the 6%S;, the method by =hich the 6%S; arrives at a decision, and the types and the purposes of documents issued by the 6%S;. CA 1-$ 5<ime 3):4) minutes9

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&urposeHto provide the student =ith an opportunity to focus on the types of organiDations involved in the rule ma+ing process, =hat impact accounting has on the environment, and the environment@s influence on accounting. CA 1-% 5<ime 1 :2) minutes9 &urposeHto provide the student =ith an opportunity to focus on =hat type of rule*ma+ing environment eEists in the 7nited States. ,n addition, this -% eEplores =hy user groups are interested in the nature of $%%& and =hy some groups =ish to issue their o=n rules. CA 1-& 5<ime 3):4) minutes9 &urposeHto provide the student =ith an opportunity to identify and define acronyms appearing in the first chapter. Some are self*evident, others are not so. CA 1-1+ 5<ime 1 :2) minutes9 &urposeHto provide the student =ith an opportunity to identify the various documents issued by different accounting organiDations. <his -% should help the student to better focus on the more important documents issued in the financial reporting area. CA 1-11 5<ime 1):1 minutes9

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&urposeHto provide the student =ith an opportunity to match the descriptions of a number of authoritative pronouncements issued by rule*ma+ing bodies to the pronouncements.

1*1)-opyright . 2)1) /ohn 0iley 1 Sons, ,nc.2ieso, Intermediate Accounting, 133e, Solutions 4anual56or ,nstructor 7se 8nly9

Ti-e an. ,u#"ose o1 Con'e"ts 1o# Ana*2sis 5-ontinued9 CA 1-12 5<ime 2):2 minutes9 &urposeHto provide the student =ith an opportunity to consider the ethical dimensions of implementation of a ne= accounting pronouncement. CA 1-13 5<ime 3):4) minutes9 &urposeHto provide the student =ith an assignment that eEplores the role and function of the Securities and EEchange -ommission. CA 1-14 5<ime 2 :3 minutes9 &urposeHto provide the student =ith an assignment that eEplores the role of the 6%S; and the rule*ma+ing process.

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CA 1-15 5<ime 2 :3 minutes9 &urposeHto provide the student =ith a =riting assignment concerning the ethical issues related to meeting earnings targets. CA 1-1 5<ime 2 :3 minutes9

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&urposeHto provide the student =ith the opportunity to discuss the role of -ongress in accounting rule*ma+ing. CA 1-1$ 5<ime 2 :3 minutes9 &urposeHto provide the student =ith an opportunity to comment on a letter sent by business eEecutives to the 6%S; and -ongress on the accounting for derivatives.

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SOLUTIONS TO CONCE,TS FOR ANAL0SIS

CA 1-1
5a9 6inancial accounting is the process that culminates in the preparation of financial reports relative to the enterprise as a =hole for use by parties both internal and eEternal to the enterprise. ,n contrast, managerial accounting is the process of identification, measurement, accumulation, analysis, prepa*ration, interpretation, and communication of financial information used by the management to plan, evaluate, and control =ithin an organiDation and to assure appropriate use of, and accountability for, its resources.

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5b9 <he financial statements most fre>uently provided are the balance sheet, the income statement, the statement of cash flo=s, and the statement of changes in o=ners@ or stoc+holders@ e>uity.

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6inancial statements are the principal means through =hich financial information is communicated to those outside an enterprise. %s indicated in 5b9, there are four major financial statements. #o=ever, some financial information is better provided, or can be provided only, by means of financial reporting other than formal financial statements. 6inancial reporting 5other than financial statements and related notes9 may ta+e various forms. EEamples include the company president@s letter or supplementary schedules in the corporate annual reports, prospectuses, reports filed =ith govern*ment agencies, ne=s releases, management@s forecasts, and descriptions of an enterprise@s social or environmental impact.

CA 1-2
5a9 ,n accordance =ith State-ent o1 Finan'ia* A''ountin( Con'e"ts No. 13 ?8bjectives of 6inancial Reporting by ;usiness Enterprises,B the objectives of financial reporting are to provide information to investors, creditors, and others 1. that is useful to present and potential investors and creditors and other users in ma+ing rational investment, credit, and similar decisions. <he information should be comprehensible to those =ho have a reasonable understanding of business and economic activities and are =illing to study the information =ith reasonable diligence. 2. to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securities or loans. Since investors@ and creditors@ cash flo=s are related to enterprise cash flo=s, financial reporting should provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflo=s to the related enterprise. 3. about the economic resources of an enterprise, the claims to those resources 5obligations of the enterprise to transfer resources to other entities and o=ners@ e>uity9, and the effects of trans*actions, events, and circumstances that change its resources and claims to those resources.

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5b9 State-ent o1 Finan'ia* A''ountin( Con'e"ts No. 1 established standards to meet the information needs of large groups of eEternal users such as investors, creditors, and their representatives. %lthough the level of sophistication related to business and financial accounting matters varies both =ithin and bet=een these user groups, users are eEpected to possess a reasonable understanding of accounting concepts, financial statements, and business and economic activities and are eEpected to be =illing to study and interpret the information =ith reasonable diligence.

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CA 1-3
%ccounting numbers affect investing decisions. ,nvestors, for eEample, use the financial statements of different companies to enhance their understanding of each company@s financial strength and operating results. ;ecause these statements follo= generally accepted accounting principles, investors can ma+e meaningful comparisons of different financial statements to assist their investment decisions. %ccounting numbers also influence creditors@ decisions. % commercial ban+ usually loo+s into a company@s financial statements and past credit history before deciding =hether to grant a loan and in =hat amount. <he financial statements provide a fair picture of the company@s financial strength 5for eEample, short*term li>uidity and long*term solvency9 and operating performance for the current period and over a period of time. <he information is essential for the ban+ to ensure that the loan is safe and sound.

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CA 1-4
,t is not appropriate to abandon mandatory accounting rules and allo= each company to voluntarily disclose the type of information it considered important. 0ithout a coherent body of accounting theory and standards, each accountant or enterprise =ould have to develop its o=n theory structure and set of practices, and readers of financial statements =ould have to familiariDe themselves =ith every company@s peculiar accounting and reporting practices. %s a result, it =ould be almost impossible to prepare state*ments that could be compared. ,n addition, voluntary disclosure may not be an efficient =ay of disseminating information. % company is li+ely to disclose less information if it has the discretion to do so. <hus, the company can reduce its cost of assembling and disseminating information. #o=ever, an investor =ishing additional information has to pay to receive additional information desired. Cifferent investors may be interested in different types of information. Since the company may not be e>uipped to provide the re>uested information, it =ould have to spend additional resources to fulfill such needsG or the company may refuse to furnish such information if it@s too costly to do so. %s a result, investors may not get the desired information or they may have to pay a significant amount of money for it. 6urthermore, redundancy in gathering and distributing information occurs =hen different investors as+ for the same information at different points in time. <o the society as a =hole, this =ould not be an efficient =ay of utiliDing resources.

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CA 1-5
5a9 8ne of the committees that the %,-&% established prior to the establishment of the 6%S; =as the -ommittee on %ccounting &rocedures 5-%&9. <he -%&, during its eEistence from 1(3( to 1( (, issued 1 %ccounting Research ;ulletins 5%R;9. ,n 1( (, the %,-&% created the %ccounting &rin*ciples ;oard 5%&;9 to replace the -%&. ;efore being replaced by the 6%S;, the %&; released 31 official pronouncements, called %&; 8pinions.

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5b9 %lthough the %R;s issued by the -%& helped to narro= the range of alternative practices to some eEtent, the -%&@s problem*by*problem approach failed to provide the =ell*defined, structured body of accounting principles that =as both needed and desired. %s a result, the -%& =as replaced by the %&;. <he %&; had more authority and responsibility than did the -%&. 7nfortunately, the %&; =as beleaguered throughout its 14*year eEistence. ,t came under fire early, charged =ith lac+ of productivity and failing to act promptly to correct alleged accounting abuses. <he %&; also met a lot of industry and -&% firm opposition and occasional governmental interference =hen tac+ling numerous thorny accounting issues. ,n fear of governmental rule ma+ing, the accounting profession investigated the ineffectiveness of the %&; and replaced it =ith the 6%S;.

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Iearning from prior eEperiences, the 6%S; has several significant differences from the %&;. <he 6%S; hasF 519 smaller membership, 529 full*time, compensated membership, 539 greater autonomy, 549 increased independence, and 5 9 broader representation. ,n addition, the 6%S; has its o=n research staff and relies on the eEpertise of various tas+ force groups formed for various projects. <hese features form the bases for the eEpectations of success and support from the public. ,n addition, the due process ta+en by the 6%S; in establishing financial accounting standards gives interested persons ample opportunity to ma+e their vie=s +no=n. <hus, the 6%S; is responsive to the needs and vie=points of the entire economic community, not just the public accounting profession. 5c9 <he %,-&% has supplemented the 6%S;@s efforts in the present standard*setting environment. <he issue papers, =hich are prepared by the %ccounting Standards EEecutive -ommittee 5%cSE-9, identify current financial reporting problems for specific industries and present alternative treat*ments of the issue. <hese papers provide the 6%S; =ith an early =arning device to insure timely issuance of 6%S; standards, ,nterpretations, and Staff &ositions. ,n situations =here the 6%S; avoids the subject of an issue paper, %cSEmay issue a Statement of &osition to provide guidance for the reporting issue. %cSE- also issues &ractice ;ulletins =hich indicate ho= the %,-&% believes a given transaction should be reported. Recently, the role of the %,-&% in standard*setting has diminished. <he 6%S; and the %,-&% agreed, that after a transition period, the %,-&% and %cSE- no longer =ill issue authoritative accounting guidance for public companies.

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CA 15a9 <he 6inancial %ccounting 6oundation 56%69 is the sponsoring organiDation of the 6%S;. <he 6%6 selects the members of the 6%S; and its %dvisory -ouncil, funds their activities, and generally oversees the 6%S;@s activities. <he 6%S; follo=s a due process in establishing a typical 6%S; Statement of 6inancial %ccounting Standards. <he follo=ing steps are usually ta+enF 519 % topic or project is identified and placed on the ;oard@s agenda. 529 % tas+ force of eEperts from various sectors is assembled to define problems, issues, and alternatives related to the topic. 539 Research and analysis are conducted by the 6%S; technical staff. 549 % preliminary vie=s document is drafted and released. 5 9 % public hearing is often held, usually !) days after the release of the preliminary vie=s. 5!9 <he ;oard analyDes and evaluates the public response. 5"9 <he ;oard deliberates on the issues and prepares an eEposure draft for release. 5'9 %fter a 3)*day 5minimum9 eEposure period for public comment, the ;oard evaluates all of the responses received. 5(9 % committee studies the eEposure draft in relation to the public responses, reevaluates its position, and revises the draft if necessary. 51)9 <he full ;oard gives the revised draft final consideration and votes on issuance of a Standards Statement. <he passage of a ne= accounting standard in the form of an 6%S; Statement re>uires the support of five of the seven ;oard members. 5b9 <he 6%S; issues three major types of pronouncementsF Standards and ,nterpretations, 6inancial %ccounting -oncepts, and <echnical ;ulletins. 6inancial accounting standards issued by the 6%S; are considered $%%&. ,n addition, the 6%S; also issues interpretations that represent modifications or eEtensions of eEisting standards and %&; 8pinions. <hese interpretations have the same authority as standards and %&; 8pinions in guiding current accounting practices.

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<he Statements of 6inancial %ccounting -oncepts 5S6%-9 help the 6%S; to avoid the ?problem*by*problem approach.B <hese statements set forth fundamental objectives and concepts that the ;oard =ill use in developing future standards of financial accounting and reporting. <hey are intended to form a cohesive set of interrelated concepts, a body of theory or a conceptual frame=or+, that =ill serve as tools for solving eEisting and emerging problems in a consistent, sound manner.

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<he 6%S; may issue a technical bulletin =hen there is a need for guidelines on implementing or applying 6%S; Standards or ,nterpretations, %&; 8pinions, %ccounting Research ;ulletins, or emerging issues. % technical bulletin is issued only =hen 519 it is not eEpected to cause a major change in accounting practice for a number of enterprises, 529 its cost of implementation is lo=, and 539 the guidance provided by the bulletin does not conflict =ith any broad fundamental accounting principle.

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,n addition, the 6%S;@s Emerging ,ssues <as+ 6orce 5E,<69 issues statements to provide guidance on ho= to account for ne= and unusual financial transactions that have the potential for creating diversity in reporting practices. <he E,<6 identifies controversial accounting problems as they arise and determines =hether they can be >uic+ly resolved or =hether the 6%S; should become involved in solving them. ,n essence, it becomes a ?problem filterB for the 6%S;. <hus, it is hoped that the 6%S; =ill be able to =or+ on more pervasive long* term problems, =hile the E,<6 deals =ith short*term emerging issues.

CA 1-$
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5a9 CA,.<he -ommittee on %ccounting &rocedure, -%&, =hich =as in eEistence from 1(3( to 1( (, =as a natural outgro=th of %,-&% committees =hich =ere in eEistence during the period 1(33 to 1(3'. <he committee =as formed in direct response to the criticism received by the accounting profession during the financial crisis of 1(2( and the years thereafter. <he authoriDation to issue pronouncements on matters of accounting principles and procedures =as based on the belief that the %,-&% had the responsibility to establish practices that =ould become generally accepted by the profession and by corporate management. %s a general rule, the -%& directed its attention, almost entirely, to resolving specific accounting problems and topics rather than to the development of generally accepted accounting principles. <he committee voted on the acceptance of specific %ccounting Research ;ulletins published by the committee. % t=o*thirds majority =as re>uired to issue a particular research bulletin. <he -%& did not have the authority to re>uire acceptance of the issued bulletins by the general membership of the %,-&%, but rather received its authority only upon general acceptance of the pronouncement by the members. <hat is, the bulletins set forth normative accounting procedures that ?should beB follo=ed by the accounting profession, but =ere not ?re>uiredB to be follo=ed. ,t =as not until =ell after the demise of the -%&, in 1(!4, that the -ouncil of the %,-&% adopted recommendations that departures from effective -%& ;ulletins should be disclosed in financial statements or in audit reports of members of the %,-&%. <he demise of the -%& could probably be traced to four distinct factorsF 519 the narro= nature of the subjects covered by the bulletins issued by the -%&, 529 the lac+ of any theoretical ground=or+ in establishing the procedures presented in the bulletins, 539 the lac+ of any real authority by the -%& in prescribing adherence to the procedures described by the bulletins, and 549 the lac+ of any formal representation on the -%& of interest groups such as corporate managers, governmental agencies, and security analysts. A,).<he objectives of the %&; =ere formulated mainly to correct the deficiencies of the -%& as described above. <he %&; =as thus charged =ith the responsibility of developing =ritten eEpression of generally accepted accounting principles through consideration of the research done by other members of the %,-&% in preparing %ccounting Research Studies. <he committee =as in turn given substantial authoritative standing in that all opinions of the %&; =ere to constitute substantial authoritative support for generally accepted accounting principles. ,f an individual member of the %,-&% decided that a principle or procedure outside of the official pronouncements of the %&; had substantial authoritative support, the member had to disclose the departure from the official %&; opinion in the financial statements of the firm in >uestion.

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<he membership of the committee comprising the %&; =as also eEtended to include representation from industry, government, and academe. <he opinions =ere also designed to include minority dissents by members of the board. EEposure drafts of the proposed opinions =ere readily distributed. <he demise of the %&; occurred primarily because the purposes for =hich it =as created =ere not being accomplished. ;road generally accepted accounting principles =ere not being developed. <he research studies supposedly being underta+en in support of subse>uent opinions to be eEpressed by the %&; =ere often ignored. <he committee in essence became a simple eEtension of the original -%& in that only very specific problem areas =ere being addressed. ,nterest groups outside of the accounting profession >uestioned the appropriateness and desirability of having the %,-&% directly responsible for the establishment of $%%&. &oliticiDation of the establishment of $%%& had become a reality because of the far*reaching effects involved in the >uestions being resolved. FAS).<he formal organiDation of the 6%S; represents an attempt to vest the responsibility of establishing $%%& in an organiDation representing the diverse interest groups affected by the use of $%%&. <he 6%S; is independent of the %,-&%. ,t is independent, in fact, of any private or govern*mental organiDation. ,ndividual -&%s, firms of -&%s, accounting educators, and representatives of private industry =ill no= have an opportunity to ma+e +no=n their vie=s to the 6%S; through their membership on the ;oard. ,ndependence is facilitated through the funding of the organiDation and payment of the members of the ;oard. 6ull*time members are paid by the organiDation and the organiDation itself is funded solely through contributions. <hus, no one interest group has a vested interest in the 6%S;. Con'*usion.<he evolution of the current 6%S; certainly does represent ?increasing politiciDation of accounting standards setting.B 4any of the efforts eEtended by the %,-&% can be directly attributed to the desire to satisfy the interests of many groups =ithin our society. <he 6%S; represents, perhaps, just another step in this evolutionary process. 5b9 %rguments for politicaliDation of the accounting rule*ma+ing processF 1. %ccounting depends in large part on public confidence for its success. -onse>uently, the critical issues are not solely technical, so all those having a bona fide interest in the output of accounting should have some influence on that output. 2. <here are numerous conflicts bet=een the various interest groups. ,n the face of this, compro*mise is necessary, particularly since the critical issues in accounting are value judgments, not the type =hich are solvable, as =e have traditionally assumed, using deterministic models. 8nly in this =ay 5reasonable compromise9 =ill the financial community have confidence in the fairness and objectivity of accounting rule*ma+ing. 3. 8ver the years, accountants have been unable to establish, on the basis of technical accoun*ting elements, rules =hich =ould bring about the desired uniformity and acceptability. <his inability itself indicates rule*setting is primarily consensual in nature. 4. <he public accounting profession, through bodies such as the %ccounting &rinciples ;oard, made rules =hich business enterprises and individuals ?hadB to follo=. 6or many years, these businesses and individuals had little say as to =hat the rules =ould be, in spite of the fact that their economic =ell*being =as influenced to a substantial degree by those rules. ,t is only natural that they =ould try to influence or control the factors that determine their economic =ell*being.

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5c9 %rguments against the politicaliDation of the accounting rule*ma+ing processF 1. 4any accountants feel that accounting is primarily technical in nature. -onse>uently, they feel that substantive, basic research by objective, independent and fair*minded researchers ultimately =ill result in the best solutions to critical issues, such as the concepts of income and capital, even if it is accepted that there isn@t necessarily a single ?rightB solution. 2. Even if it is accepted that there are no ?absolute truthsB as far as critical issues are concerned, many feel that professional accountants, ta+ing into account the diverse interests of the various groups using accounting information, are in the best position, because of their independence, education, training, and objectivity, to decide =hat generally accepted accounting principles ought to be. 3. <he compleE situations that arise in the business =orld re>uire that trained accountants develop the appropriate accounting principles. 4. <he use of consensus to develop accounting principles =ould decrease the professional status of the accountant. . <his approach =ould lead to ?lobbyingB by various parties to influence the establishment of ac counting principles.

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CA 1-%
5a9 <he public3private miEed approach appears to be the =ay rules are established in the 7nited States. ,n many respects, the 6%S; is a >uasi*governmental agency in that its pronouncements are re>uired to be follo=ed because the SE- has provided support for this approach. <he SE- has the ultimate po=er to establish $%%& but has chosen to permit the private sector to develop these rules. ;y accepting the standards established by the 6%S; as authoritative, it has granted much po=er to the 6%S;. 5,t might be useful to inform the students that not all countries follo= this model. 6or eEample, the purely political approach is used in 6rance and 0est $ermany. <he private, professional approach is employed in %ustralia, -anada, and the 7nited 2ingdom.9

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5b9 &ublicly reported accounting numbers influence the distribution of scarce resources. Resources are channeled =here needed at returns commensurate =ith perceived ris+. <hus, reported accounting numbers have economic effects in that resources are transferred among entities and individuals as a conse>uence of these numbers. ,t is not surprising then that individuals affected by these numbers =ill be eEtremely interested in any proposed changes in the financial reporting environment. 5c9 <he %ccounting Standards EEecutive -ommittee 5%cSE- of the %,-&%9, among other groups, has presented a potential challenge to the eEclusive right of the 6%S; to establish accounting principles. %lso, -ongress has been attempting to legislate certain accounting practices, particularly to help struggling industries. Some possible reasons =hy other groups might =ish to establish $%%& areF 1. %s indicated in the previous ans=er, these rules have economic effects and therefore certain groups =ould prefer to ma+e their o=n rules to ensure that they receive just treatment. 2. Some believe the 6%S; does not act >uic+ly to resolve accounting matters, either because it is not that interested in the subject area or because it lac+s the resources to do so. 3. Some argue that the 6%S; does not have the competence to legislate $%%& in certain areas. 6or eEample, many have argued that the 6%S; should not legislate $%%& for not*for*profit enterprises because the problems are uni>ue and not =ell +no=n by the 6%S;.

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CA 1-&
5a9 AIC,A.%merican ,nstitute of -ertified &ublic %ccountants. <he national organiDation of practicing certified public accountants.

5b9 CA,.-ommittee on %ccounting &rocedure. % committee of practicing -&%s =hich issued 1 %ccounting Research ;ulletins bet=een 1(3( and 1( ( and is a predecessor of the 6%S;.

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5c9

AR).%ccounting Research ;ulletins. 8fficial pronouncements of the -ommittee on %ccounting &rocedure =hich, unless superseded, remain a primary source of $%%&.

5d9 A,).%ccounting &rinciples ;oard. % committee of public accountants, industry accountants and academicians =hich issued 31 8pinions bet=een 1( ( and 1("3. <he %&; replaced the -%& and =as itself replaced by the 6%S;. ,ts opinions, unless superseded, remain a primary source of $%%&. 5e9 FAF.6inancial %ccounting 6oundation. %n organiDation =hose purpose is to select members of the 6%S; and its %dvisory -ouncils, fund their activities, and eEercise general oversight. FASAC.6inancial %ccounting Standards %dvisory -ouncil. %n organiDation =hose purpose is to consult =ith the 6%S; on issues, project priorities, and select tas+ forces.

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5g9 SO,.Statements of &osition. Statements issued by the %,-&% 5through the %ccounting Standards EEecutive -ommittee of its %ccounting Standards Civision9 =hich are generally devoted to emerging problems not addressed by the 6%S; or the SE-. 5h9 6AA,.$enerally accepted accounting principles. % common set of standards, principles, and procedures =hich have substantial authoritative support and have been accepted as appropriate because of universal application. 5i9 C,A.-ertified public accountant. %n accountant =ho has fulfilled certain education and eEperience re>uirements and passed a rigorous eEamination. 4ost -&%s offer auditing, taE, and management consulting services to the general public. FAS).6inancial %ccounting Standards ;oard. <he primary body =hich currently establishes and improves financial accounting and reporting standards for the guidance of issuers, auditors, users, and others.

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5+9 SEC.Securities and EEchange -ommission. %n independent regulatory agency of the 7nited States government =hich administers the Securities %cts of 1(33 and 1(34 and other acts. 5l9 IAS).,nternational %ccounting Standards ;oard. %n international group, formed in 1("3, that is actively developing and issuing accounting standards that =ill have international appeal and hopefully support.

CA 1-1+
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1. 2. 3. 4. 5b9, 5e9 5a9 5c9 5d9

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1. 2. 3. 4. . !. 5d9 5f9 5c9 5e9 5a9 5b9

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CA 1-12
5a9 ,nclusion or omission of information that materially affects net income harms particular sta+eholders. %ccountants must recogniDe that their decision to implement 5or delay9 reporting re>uirements =ill have immediate conse>uences for some sta+eholders.

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5b9 Kes. ;ecause the 6%S; rule results in a fairer representation, it should be implemented as soon as possibleH regardless of its impact on net income. SE- Staff ;ulletin Ao. "4 5Cecember 3), 1('"9 re>uires a statement as to =hat the eEpected impact of the standard =ill be. 5c9 <he accountant@s responsibility is to provide financial statements that present fairly the financial condition of the company. ;y advocating early implementation, 0eller fulfills this tas+.

5d9 &otential lenders and investors, =ho read the financial statements and rely on their fair represen*tation of the financial condition of the company, have the most to gain by early implementation. % stoc+holder =ho is considering the sale of stoc+ may be harmed by early implementation that lo=ers net income 5and may lo=er the value of the stoc+9.

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CA 1-13
5a9 <he Securities and EEchange -ommission 5SE-9 is an independent federal agency that receives its authority from federal legislation enacted by -ongress. <he Securities and EEchange %ct of 1(34 created the SE-.

5b9 %s a result of the Securities and EEchange %ct of 1(34, the SE- has legal authority relative to accounting practices. <he 7.S. -ongress has given the SE- broad regulatory po=er to control accounting principles and procedures in order to fulfill its goal of full and fair disclosure. 5c9 <here is no direct relationship as the SE- =as created by -ongress and the 6inancial %ccounting Standards ;oard 56%S;9 =as created by the private sector. #o=ever, the SE- historically has follo=ed a policy of relying on the private sector to establish financial accounting and reporting standards +no=n as generally accepted accounting principles 5$%%&9. <he SE- does not necessarily agree =ith all of the pronouncements of the 6%S;. ,n cases of unresolved differences, the SE- rules ta+e precedence over 6%S; rules for companies =ithin SE- jurisdiction.

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CA 1-14
5a9 <he process by =hich a topic is selected or identified as appropriate for study by the 6inancial %ccounting Standards ;oard 56%S;9 is described belo=. J &roblems or issues come to the attention of the 6%S; from : the Emerging ,ssues <as+ 6orce =hich may identify significant emerging accounting issues that it feels the 6%S; should address. : the 6inancial %ccounting Standards %dvisory -ouncil =hich addresses the 6%S; on the priority of problems and encourages the 6%S; to underta+e ne= projects. : the Research and <echnical %ctivities Staff of the 6%S;, =hich monitors business perio*dicals for stories concerning unusual transactions or events and may detect an emerging problem. : the close contact it maintains =ith various business, industry, government, professional financial groups, and the SE-.

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: its staff =hich may learn of emerging problems as it responds to technical in>uiries received from preparers and auditors. J <opics are then placed on the 6%S; agenda.

J <he plan for major technical agenda projects is given prompt public notice in the 6%S;@s ne=sletter
?Status Report.B

J % tas+ force of eEperts from various sectors is assembled to define problems, issues, and alternatives 3)
related to the topic. analysis.

J <he tas+ force inputs are submitted to the 6%S;@s <echnical %ctivities Civision for research and
5b9 8nce a topic is considered appropriate for consideration by the 6%S;, major steps in the process leading to the issuance of a State-ent o1 Finan'ia* A''ountin( Stan.a#.s include the follo=ingF

J Research and analysis is conducted by the 6%S; <echnical Staff. J % preliminary vie=s is drafted and released for =ritten comments.
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J 0ritten comments are submitted and a public hearing is held approEimately !) days after the
preliminary vie=s is released.

J <he ;oard analyDes and evaluates the public responses.

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J <he ;oard deliberates on the issues and prepares an eEposure draft =hich is released for public
comment.

J %fter a 3)*day 5minimum9 eEposure period and possible public hearings from industry groups, the
;oard evaluates all comments received. revises the draft if necessary. State-ent.

J % committee studies the eEposure draft in relation to the public responses, reevaluates its position, and J <he full ;oard gives the revised final draft consideration and votes on the issuance of a Stan.a#.s
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5c9 %t least three other organiDations =ho can influence the setting of generally accepted accounting principles include the

J %merican ,nstitute of -ertified &ublic %ccountants. J Securities and EEchange -ommission. 1) J 6inancial EEecutives ,nstitute.

CA 1-15
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5a9 <he ethical issue in this case relates to ma+ing >uestionable entries to meet eEpected earnings forecasts. %s indicated in this chapter, businesses@ concentration on ?maEimiDing the bottom line,B ?facing the challenges of competition,B and ?stressing short*term resultsB places accountants in an environment of conflict and pressure.

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5b9 $iven that Aormand has pleaded guilty, he certainly acted improperly. Coing the right thing, ma+ing the right decision, is not al=ays easy. Right is not al=ays obvious, and the pressures to ?bend the rules,B ?to play the game,B ?to just ignore itB can be considerable. 5c9 Ao doubt, Aormand =as in a difficult position. , am sure that he =as concerned that if he failed to go along, it =ould affect his job performance negatively or that he might be terminated. <hese job pressures, time pressures, peer pressures often lead individuals astray. -an it happen to youL 8ne individual noted that at a seminar on ethics sponsored by the -4% Society of Southern -alifornia, attendees =ere as+ed if they had ever been pressured to ma+e >uestionable entries. <his individual noted that to the best of his recollection, everybody raised a hand, and more than one had eventually chosen to resign.

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5d9 4ajor sta+eholders areF 519 <roy Aormand, 529 present and potential stoc+holders and creditors of 0orld-om, 539 employees, and 549 family. RecogniDe that 0orld-om is the largest ban+ruptcy in 7nited States history, so many individuals are affected.

CA 1-1
5a9 -onsidering the economic conse>uences of $%%&, it is not surprising that special interest groups become vocal and critical 5some supporting, some opposing9 =hen rules are being formulated. <he 6%S;@s derivative accounting pronouncement is no eEception. 4any from the ban+ing industry, for eEample, criticiDed the rule as too compleE and leading to unnecessary earnings volatility. <hey also indicated that the proposal may discourage prudent ris+ management activities and in some cases could present misleading financial information. %s a result, -ongress is often approached to put pressure on the 6%S; to change its rulings. ,n the stoc+ option controversy, industry =as >uite effective in going to -ongress to force the 6%S; to change its conclusions. ,n the derivative controversy, Rep. Richard ;a+er introduced a bill =hich =ould force the SE- to formally approve each standard issued by the 6%S;. Aot only =ould this process delay adoption, but could lead to additional politicaliDation of the rule*ma+ing process. Cingell commented that -ongress should stay out of the rule*ma+ing process and defended the 6%S;@s approach to establishing $%%&.

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5b9. %ttempting to set $%%& by a political process =ill probably lead to the follo=ing conse>uencesF 5a9 <oo many alternatives. 5b9 Iac+ of clarity that =ill lead to inconsistent application. 5c9 Iac+ of disclosure that reduces transparency. 5d9 Aot comprehensive in scope.

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0ithout an independent process, $%%& =ill be based on political compromise. % classic illustration is =hat happened in the savings and loan industry. %pplying generally accepted accounting principles to the S1I industry =ould have forced regulators to restrict activities of many S1Is. 7nfortunately, accounting principles =ere overridden by regulatory rules and the resulting lac+ of transparency mas+ed the problems. 0illiam Siedman, former 6C,- -hairman noted later that it =as ?the =orst mista+e in the history of government.B %nother indication of the problem of government intervention is sho=n in the accounting standards used by some countries around the =orld. -ompleteness and transparency of information needed by investors and creditors is not available in order to meet or achieve other objectives.

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CA 1-1$
5a9 <he ?due processB system involves the follo=ingF 1. ,dentifying topics and placing them on the ;oard@s agenda. 2. Research and analysis is conducted and preliminary vie=s of pros and cons issued. 3. % public hearing is often held. 4. ;oard evaluates research and public responses and issues eEposure draft. . ;oard evaluates responses and changes eEposure draft, if necessary. 6inal statement is then issued.

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5b9 Economic conse>uences mean the impact of accounting reports on the =ealth positions of issuers and users of financial information and the decision*ma+ing behavior resulting from that impact. 5c9 Economic conse>uences indicated in the letter areF 519 concerns related to the potential impact on the capital mar+ets, 529 the =ea+ening of companies@ ability to manage ris+, and 539 the adverse control implications of implementing costly and compleE ne= rules imposed at the same time as other major initiatives, including the Kear 2))) issues and a single European currency. <he principal point of this letter is to delay the finaliDation of the derivatives standard. %s indicated in the letter, the authors of this letter urge the 6%S; to eEpose its ne= proposal for public comment, follo=ing the established due process procedures that are essential to acceptance of its standards and providing sufficient time for affected parties to understand and assess the ne= approach. 5%uthors noteF <he 6%S; indicated in a follo=* up letter that all due process procedures had been follo=ed and all affected parties had more than ample time to comment. ,n addition, the 6%S; issued a follo=*up standard, =hich delayed the effective date of the standard, in part to give companies more time to develop the information systems needed for implementation of the standard.9 <he reason =hy the letter =as sent to -ongress =as to put additional pressure on the 6%S; to delay or drop the issuance of a rule on derivatives. 7nfortunately, in too many cases, =hen the business community does not li+e the ans=er proposed by the 6%S;, it resorts to lobbying members of -ongress. <he lobbying efforts usually involve developing some type of legislation that =ill negate the rule. ,n some cases, efforts involve challenging the 6%S;@s authority to develop rules in certain areas =ith additional -ongressional oversight.

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4a5 T!e 7e2 o#(ani8ations in9o*9e. in #u*e -a7in( in t!e U.S. a#e t!e AIC,A3 FAS)3 an. SEC. See a*so 4'5. 4:5 Di11e#ent aut!o#itati9e *ite#atu#e "e#tainin( to -et!o.s #e'o#.in( a''ountin( t#ansa'tions e;ists to.a2. So-e aut!o#itati9e *ite#atu#e !as #e'ei9e. -o#e su""o#t 1#o- t!e "#o1ession t!an ot!e# *ite#atu#e. T!e *ite#atu#e t!at !as su:stantia* aut!o#itati9e su""o#t is t!e one -ost su""o#te. :2 t!e "#o1ession an. s!ou*. :e 1o**o<e. <!en #e'o#.in( a''ountin( t#ansa'tions. T!ese stan.a#.s an. "#o'e.u#es a#e 'a**e. (ene#a**2 a''e"te. a''ountin( "#in'i"*es 46AA,5. =it! i-"*e-entation o1 t!e Co.i1i'ation3 <!at >ua*i1ies as aut!o#itati9e is an2 *ite#atu#e 'ontaine. in t!e Co.i1i'ation. T!e Co.i1i'ation '!an(es t!e <a2 6AA, is .o'u-ente.3 "#esente.3 an. u".ate.. It '#eates one *e9e* o1 6AA, <!i'! is 'onsi.e#e. aut!o#itati9e. A** ot!e# a''ountin( *ite#atu#e is 'onsi.e#e. non-aut!o#itati9e. =!at !a""ens i1 t!e Co.i1i'ation .oes not 'o9e# a 'e#tain t2"e o1 t#ansa'tion o# e9ent? In t!is 'ase3 ot!e# a''ountin( *ite#atu#e s!ou*. :e 'onsi.e#e. <!i'! in'*u.es FAS) Con'e"ts State-ents3 inte#nationa* 1inan'ia* #e"o#tin( stan.a#.s an. ot!e# "#o1essiona* *ite#atu#e. 4'5 Ru*e--a7in( in t!e U.S. !as e9o*9e. t!#ou(! t!e <o#7 o1 t!e 1o**o<in( o#(ani8ations@ 1. A-e#i'an Institute o1 Ce#ti1ie. ,u:*i' A''ountants 4AIC,A5Ait is t!e nationa* "#o1essiona* o#(ani8ation o1 "#a'ti'in( Ce#ti1ie. ,u:*i' A''ountants 4C,As5. Out(#o<t!s o1 t!e AIC,A !a9e :een t!e Co--ittee on A''ountin( ,#o'e.u#e 4CA,5 <!i'! issue. A''ountin( Resea#'! )u**etins an. t!e A''ountin( ,#in'i"*es )oa#. 4A,)5 <!ose -aBo# "u#"oses <e#e to a.9an'e <#itten e;"#ession o1 a''ountin( "#in'i"*es3 .ete#-ine a""#o"#iate "#a'ti'es3 an. na##o< t!e a#eas o1 .i11e#en'e an. in'onsisten'2 in "#a'ti'e. 2. Finan'ia* A''ountin( Stan.a#.s )oa#. 4FAS)5At!e -ission o1 t!e FAS) is to esta:*is! an. i-"#o9e stan.a#.s o1 1inan'ia* a''ountin( an. #e"o#tin( 1o# t!e (ui.an'e an. e.u'ation o1 t!e "u:*i'3 <!i'! in'*u.es issue#s3 au.ito#s3 an. use#s o1 t!e 1inan'ia* in1o#-ation.

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FINANCIAL RE,ORTIN6 ,RO)LE/ 4Continue.5 3. Se'u#ities an. E;'!an(e Co--ission 4SEC5At!e SEC is an in.e"en.ent #e(u*ato#2 a(en'2 o1 t!e Unite. States (o9e#n-ent <!i'! a.-iniste#s t!e Se'u#ities A't o1 1&333 t!e Se'u#ities E;'!an(e A't o1 1&343 an. se9e#a* ot!e# a'ts. T!e SEC !as :#oa. "o<e# to "#es'#i:e t!e a''ountin( "#a'ti'es an. stan.a#.s to :e e-"*o2e. :2 'o-"anies t!at 1a** <it!in its Bu#is.i'tion.
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4.5 T!e SEC an. t!e AIC,A !a9e :een t!e aut!o#it2 1o# 'o-"*ian'e <it! 6AA,. T!e SEC !as in.i'ate. t!at 1inan'ia* state-ents 'on1o#-in( to stan.a#.s set :2 t!e FAS) <i** :e "#esu-e. to !a9e aut!o#itati9e su""o#t. T!e AIC,A3 in Ru*e 2+3 o1 t!e Co.e o1 ,#o1essiona* Et!i's3 #e>ui#es t!at -e-:e#s "#e"a#e 1inan'ia* state-ents in a''o#.an'e <it! 6AA,. Fai*u#e to 1o**o< Ru*e 2+3 'an *ea. to t!e *oss o1 a C,ACs *i'ense to "#a'ti'e.

1*24-opyright . 2)1) /ohn 0iley 1 Sons, ,nc.2ieso, Intermediate Accounting, 133e, Solutions 4anual56or ,nstructor 7se 8nly9

INTERNATIONAL RE,ORTIN6 ,RO)LE/

4a5 T!e Inte#nationa* A''ountin( Stan.a#.s )oa#. is an in.e"en.ent3 "#i9ate*2 1un.e. a''ountin( stan.a#.s sette# :ase. in Lon.on3 UD. T!e )oa#. is 'o--itte. to .e9e*o"in(3 in t!e "u:*i' inte#est3 a sin(*e set o1 !i(! >ua*it23 un.e#stan.a:*e an. en1o#'ea:*e (*o:a* a''ountin( stan.a#.s t!at #e>ui#e t#ans"a#ent an. 'o-"a#a:*e in1o#-ation in (ene#a* "u#"ose 1inan'ia* state-ents. In a..ition3 t!e )oa#. 'oo"e#ates <it! nationa* a''ountin( stan.a#.s sette#s to a'!ie9e 'on9e#(en'e in a''ountin( stan.a#.s a#oun. t!e <o#*..
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4:5 In su--a#23 t!e 1o**o<in( (#ou"s -i(!t (ain -ost 1#o- !a#-oni8ation o1 1inan'ia* #e"o#tin(@ J In9esto#s3 in9est-ent ana*2sts an. sto'7:#o7e#s@ to 1a'i*itate inte#na-tiona* 'o-"a#isons 1o# in9est-ent .e'isions.
1 J C#e.it (#anto#s@ 1o# si-i*a# #easons to :u**et "oint a:o9e. J /u*tinationa* 'o-"anies@ as "#e"a#e#s3 in9esto#s3 a""#aise#s o1 "#o-.u'ts o#

sta113 an. as -o9e#s o1 sta11 a#oun. t!e (*o:eE a*so3 as #aise#s o1 1inan'e on inte#nationa* -a#7ets 4t!is a*so a""*ies to so-e 'o-"-anies t!at a#e not -u*tinationa*s5.
2) J 6o9e#n-ents@ as ta; 'o**e'to#s an. !osts o1 -u*tinationa*sE a*so inte#este. a#e

se'u#ities -a#7ets #e(u*ato#s an. (o9e#n-enta* an. non(o9e#n-enta* #u*e -a7e#s. 4'5 T!e 1un.a-enta* a#(u-ent a(ainst !a#-oni8ation is t!at3 to t!e e;tent t!at inte#nationa* .i11e#en'es in a''ountin( "#a'ti'es #esu*t 1#o- un.e#-*2in( e'ono-i'3 *e(a*3 so'ia*3 an. ot!e# en9i#on-enta* 1a'to#s3 !a#-oni-8ation -a2 not :e Busti1ie.. Di11e#ent a''ountin( !as (#o<n u" to se#9e t!e .i11e#ent nee.s o1 .i11e#ent use#sE t!is -i(!t su((est t!at t!e e;istin( a''ountin( "#a'ti'e is F'o##e'tG 1o# a (i9en nation an. s!ou*. not :e '!an(e. -e#e*2 to si-"*i12 t!e <o#7 o1 -u*tinationa* 'o-"anies o# au.ito#s. T!e#e .oes see- to :e st#en(t! in t!is "oint "a#ti'u*a#*2 1o# s-a**e# 'o-"anies <it! no si(ni1i'ant -u*tinationa* a'ti9ities o# 'onne'tions. To 1oist u"on a s-a** "#i9ate 1a-i*2 'o-"an2 in Lu;e-:ou#( *a9is! .is'*osu#e #e>ui#e-ents an. t!e nee. to #e"o#t a Ft#ue an. 1ai#G 9ie< -a2 :e an e;"ensi9e an. unne'essa#2 "ie'e o1 !a#-oni8ation.

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INTERNATIONAL RE,ORTIN6 ,RO)LE/ 4Continue.5 T!e -ost o:9ious o:sta'*e to !a#-oni8ation is t!e s!ee# si8e an. .ee"#oote.ness o1 t!e .i11e#en'es in a''ountin(. T!ese .i11e#en'es !a9e (#o<n u" o9e# t!e "#e9ious 'entu#2 :e'ause o1 .i11e#en'es in use#s3 *e(a* s2ste-s3 an. so on. T!us3 t!e .i11e#en'es a#e st#u'tu#a* #at!e# t!an 'os-eti'3 an. #e>ui#e #e9o*utiona#2 a'tion to #e-o9e t!e-.
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Note to inst#u'to#@Fo# a -o#e 'o-"*ete t#eat-ent o1 inte#nationa* a' 'ountin( stan.a#.s3 stu.ents s!ou*. #ea. A""en.i; 24)3 FInte#nationa* A''ountin( Stan.a#.s.G

1*2!-opyright . 2)1) /ohn 0iley 1 Sons, ,nc.2ieso, Intermediate Accounting, 133e, Solutions 4anual56or ,nstructor 7se 8nly9

,ROFESSIONAL RESEARCH
5a9 <hree =aysF a. 7se the main menu follo=ing 8riginal &ronouncements and then Statement of 6inancial %ccounting -oncepts. b. MueryF ?-8A 1B, ?8bjectives of 6inancial ReportingB. c. SearchF Search =ithin a single 8& document type, Cocument titleF Statement of accounting concepts, Muery forF Ao. 1 or 1. -8A 1, &ar. ".6inancial reporting includes not only financial statements but also other means of communicating information that relates, directly or indirectly, to the information provided by the accounting systemHthat is, information about an enterprise@s resources, obligations, earnings, etc. 4anagement may communicate information to those outside an enterprise by means of financial reporting other than formal financial statements either because the information is re>uired to be disclosed by authoritative pronouncement, regulatory rule, or custom or because management considers it useful to those outside the enterprise and discloses it voluntarily. ,nformation communicated by means of financial reporting other than financial statements may ta+e various forms and relate to various matters. -orporate annual reports, prospectuses, and annual reports filed =ith the Securities and EEchange -ommission are common eEamples of reports that include financial statements, other financial information, and nonfinancial information. Ae=s releases, management@s forecasts or other descriptions of its plans or eEpectations, and descriptions of an enterprise@s social or environmental impact are eEamples of reports giving financial information other than financial statements or giving only nonfinancial information. -8A 1, &ar, 24 and 2 F 24.4any people base economic decisions on their relationships to and +no=ledge about business enterprises and thus are potentially interested in the information provided by financial reporting. %mong the potential users are o=ners, lenders, suppliers, potential investors and creditors, employees, management, directors, customers, financial analysts and advisors, bro+ers, under=riters, stoc+ eEchanges, la=yers, economists, taEing authorities, regulatory authorities, legislators, financial press and reporting agencies, labor unions, trade associations, business researchers, teachers and students, and the public. 4embers and potential members of some groupsHsuch as o=ners, creditors, and employeesHhave or contemplate having direct economic interests in particular business enterprises. 4anagers and directors, =ho are charged =ith managing the enterprise in the interest of o=ners 5paragraph 129, also have a direct interest. 4embers of other groupsHsuch as financial analysts and advisors, regulatory authorities, and labor unionsHhave derived or indirect interests because they advise or represent those =ho have or contemplate having direct interests. &otential users of financial information most directly concerned =ith a particular business enter*prise are generally interested in its ability to generate favorable cash flo=s because their decisions relate to amounts, timing, and uncertainties of eEpected cash flo=s. <o investors, lenders, suppliers, and employees, a business enterprise is a source of cash in the form of dividends or interest and perhaps appreciated mar+et prices, repayment of borro=ing, payment for goods or services, or salaries or =ages. <hey invest cash, goods, or services in an enterprise and eEpect to obtain sufficient cash in return to ma+e the investment =orth=hile. <hey are directly concerned =ith the ability of the enterprise to generate favorable cash flo=s and may also be concerned =ith ho= the mar+et@s perception of that ability affects the relative prices of its securities. <o customers, a business enterprise is a source of goods or services, but only by obtaining sufficient cash to pay

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,ROFESSIONAL RESEARCH 4Continue.5

for the resources it uses and to meet its other obligations can the enterprise provide those goods or services. <o managers, the cash flo=s of a business enterprise are a significant part of their management responsibilities, including their accountability to directors and o=ners. 4any, if not most, of their decisions have cash flo= conse>uences for the enterprise. <hus, investors, creditors, employees, customers, and managers significantly share a common interest in an enterprise@s ability to generate favorable cash flo=s. 8ther potential users of financial information share the same interest, derived from investors, creditors, employees, customers, or managers =hom they advise or represent or derived from an interest in ho= those groups 5and especially stoc+holders9 are faring.

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1*2'-opyright . 2)1) /ohn 0iley 1 Sons, ,nc.2ieso, Intermediate Accounting, 133e, Solutions 4anual56or ,nstructor 7se 8nly9

,ROFESSIONAL SI/ULATION
4a5 T!e te#- Fa''ountin( "#in'i"*esG in t!e au.ito#Cs #e"o#t in'*u.es not on*2 a''ountin( "#in'i"*es :ut a*so t!e "#a'ti'es an. t!e -et!o.s o1 a""*2in( t!e-. A*t!ou(! t!e te#- >uite natu#a**2 e-"!asi8es t!e "#i-a#2 o# 1un.a-enta* '!a#a'te# o1 so-e "#in'i"*es3 it in'*u.es (ene#a* #u*es a.o"te. o# "#o1esse. as (ui.es to a'tion in "#a'ti'e. T!e te#- .oes not 'onnote3 !o<e9e#3 #u*es 1#o- <!i'! t!e#e 'an :e no .e9iation. In so-e 'ases t!e >uestion is <!i'! o1 se9e#a* "a#tia**2 #e*e9ant "#in'i"*es a#e a""*i'a:*e. Neit!e# is t!e te#Fa''ountin( "#in'i"*esG ne'essa#i*2 s2non2-ous <it! a''ountin( t!eo#2. A''ountin( t!eo#2 is t!e :#oa. a#ea o1 in>ui#2 .e9ote. to t!e .e1inition o1 o:Be'ti9es to :e se#9e. :2 a''ountin(3 t!e .e9e*o"-ent an. e*a:o#ation o1 #e*e9ant 'on'e"ts3 t!e "#o-otion o1 'onsisten'2 t!#ou(! *o(i'3 t!e e*i-ination o1 1au*t2 #easonin(3 an. t!e e9a*uation o1 a''ountin( "#a'ti'e. 6ene#a**2 a''e"te. a''ountin( "#in'i"*es a#e t!ose "#in'i"*es 4<!et!e# o# not t!e2 !a9e on*2 *i-ite. usa(e5 t!at !a9e su:stantia* aut!o#itati9e su""o#t. =!et!e# a (i9en "#in'i"*e !as aut!o#itati9e su""o#t is a >uestion o1 1a't an. a -atte# o1 Bu.(-ent. T!e C,A is #es"onsi:*e 1o# 'o**e'tin( t!e a9ai*a:*e e9i.en'e o1 aut!o#itati9e su""o#t an. Bu.(in( <!et!e# it is su11i'ient to :#in( t!e "#a'ti'e <it!in t!e :oun.s o1 (ene#a**2 a''e"te. a''ountin( "#in'i"*es. =it! i-"*e-entation o1 t!e Co.i1i'ation3 <!at >ua*i1ies as aut!o#itati9e is an2 *ite#atu#e 'ontaine. in t!e Co.i1i'ation. T!e Co.i1i'ation '!an(es t!e <a2 6AA, is .o'u-ente.3 "#esente.3 an. u".ate.. It '#eates one *e9e* o1 6AA, <!i'! is 'onsi.e#e. aut!o#itati9e. A** ot!e# a''ountin( *ite#atu#e is 'onsi.e#e. non-aut!o#itati9e. =!at !a""ens i1 t!e Co.i1i'ation .oes not 'o9e# a 'e#tain t2"e o1 t#ansa'tion o# e9ent? In t!is 'ase3 ot!e# a''ountin( *ite#atu#e s!ou*. :e 'onsi.e#e. <!i'! in'*u.es FAS) Con'e"ts State-ents3 inte#nationa* 1inan'ia* #e"o#tin( stan.a#.s an. ot!e# "#o1essiona* *ite#atu#e.

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,ROFESSIONAL SI/ULATION 4Continue.5 Fo# e;a-"*e3 ot!e# e9i.en'e o1 aut!o#itati9e su""o#t -a2 :e 1oun. in t!e "u:*is!e. o"inions o1 t!e 'o--ittees o1 t!e A-e#i'an A''ountin( Asso'iation an. t!e a11i#-ati9e o"inions o1 "#a'titione#s an. a'a.e-i'ians in a#ti'*es3 te;t:oo7s3 an. e;"e#t testi-on2. Si-i*a#*23 t!e 9ie<s o1 sto'7 e;'!an(es3 'o--e#'ia* an. in9est-ent :an7e#s3 an. #e(u*ato#2 'o--issions in1*uen'e t!e (ene#a* a''e"tan'e o1 a''ountin( "#in'i"*es an.3 !en'e3 a#e 'onsi.e#e. in .ete#-inin( <!et!e# an a''ountin( "#in'i"*e !as su:stantia* aut!o#itati9e su""o#t. )usiness "#a'ti'e a*so is a sou#'e o1 e9i.en'e. Fina**23 :e'ause t!e2 in1*uen'e :usiness "#a'ti'e3 t!e ta; 'o.e an. state *a<s a#e sou#'es o1 e9i.en'e too.

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1*3)-opyright . 2)1) /ohn 0iley 1 Sons, ,nc.2ieso, Intermediate Accounting, 133e, Solutions 4anual56or ,nstructor 7se 8nly9