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Financial Accounting and


Accounting Standards

Need
Need to
to Develop
Develop Standards
Standards
Various users
need financial
information

The accounting profession has


attempted to develop a set of
standards that are generally
accepted and universally
practiced.
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Financial Statements
Balance Sheet
Income Statement
Statement of Stockholders Equity
Statement of Cash Flows
Note Disclosure

Generally Accepted
Accounting Principles
(GAAP)

Parties
Parties Involved
Involved in
in Standard
Standard Setting
Setting
Three organizations:

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Securities and Exchange Commission (SEC)

requires filing of audited financial statements by companies that issue


securities to the public or are listed on a stock exchange

requires public companies to adhere to GAAP

relies on FASB to develop accounting standards

American Institute of Certified Public Accountants (AICPA)

national professional organization of practicing Certified Public


Accountants (CPAs)

important contributor to the development of GAAP

created Committee on Accounting Procedure (CAP) & Accounting


Principles Board (APB)

Financial Accounting Standards Board (FASB)

Financial
Financial Accounting
Accounting Standards
Standards Board
Board
Types of Pronouncements

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Standards, Interpretations, and Staff Positions standards


issued are GAAP; interpretations that modify or extend
existing standards; staff positions provide interpretive
guidance and minor amendments

Financial Accounting Concepts fundamental objectives and


concepts used to develop future standards

Emerging Issues Task Force Statements deals with new


and unusual financial transactions that may potentially create
differing financial reporting practices

Generally
Generally Accepted
Accepted Accounting
Accounting Principles
Principles
Principles that have substantial authoritative support.
Major sources of GAAP:

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FASB Standards, Interpretations, and Staff Positions.

APB Opinions.

AICPA Accounting Research Bulletins.

Issues
Issues in
in Financial
Financial Reporting
Reporting
International Accounting Standards
Two sets of standards accepted for international use:

U.S. GAAP, issued by the FASB.

International Financial Reporting Standards


(IFRS), issued by the IASB.

FASB and IASB recognize that


global markets will best be
served if only one set of GAAP is
used otherwise, known as
International Convergence.
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RELEVANT FACTS

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IFRS tends to be simpler in its accounting and disclosure


requirements; some people say more principles-based. IFRS
is used in over 115 countries and on most foreign exchanges.

GAAP is more detailed; some people say more rules-based.


This difference in approach has resulted in a debate about the
merits of principles-based versus rules-based standards.

It is likely that not all companies would be required


immediately to change to IFRS, but there would be a transition
period in which this would be accomplished.

RELEVANT FACTS
Bangladesh Financial Reporting Standards (BFRS)
The Financial Reporting Standards prescribed by the Institute of
Chartered Accountants in Bangladesh (ICAB) are known as Bangladesh
Financial Reporting Standards (BFRS, including Bangladesh Accounting
Standards, BAS).
As at January 2013, a version of all IFRS (and IAS) issued by the IASB
had been adopted as BFRS by the ICAB, with the following exceptions:
- IAS 29 Financial Reporting in Hyperinflationary Economies adopted
but will not enter into force until 2015
- IFRS 9 Financial Instruments.
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Conceptual Framework
The Framework is comprised of three levels:

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First Level = Basic Objectives

Second Level = Qualitative Characteristics and


Elements

Third Level = Recognition, Measurement, and


Disclosure Concepts.

ASSUMPTIONS

PRINCIPLES

1. Economic entity

1. Measurement

1. Cost-benefit

2. Going concern

2. Revenue recognition

2. Materiality

3. Monetary unit

3. Expense recognition

3. Industry practice

4. Periodicity

4. Full disclosure

4. Conservatism

QUALITATIVE
CHARACTERISTICS
Relevance
Reliability
Comparability
Consistency

1.
2.
Conceptual Framework for
Financial Reporting

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CONSTRAINTS

3.

Third
level

ELEMENTS
Assets, Liabilities, and Equity
Investments by owners
Distribution to owners
Comprehensive income
Revenues and Expenses
Gains and Losses

OBJECTIVES
Useful in investment and credit
decisions
Useful in assessing future cash
flows
About enterprise resources,
claims to resources,
and changes in them

Second level

First level

First Level: Basic Objectives


Second Level: Fundamental Concepts
Objective of general-purpose financial reporting is:
To provide financial information about the reporting entity
that is useful to present and potential equity investors,
lenders, and other creditors in making decisions about
providing resources to the entity.
Qualitative Characteristics
The FASB identified the Qualitative Characteristics of
accounting information that distinguish better (more useful)
information from inferior (less useful) information for
decision-making purposes.
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Second Level: Qualitative Characteristics


Primary Qualities:

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Relevance making a difference in a decision.


Predictive value
Feedback value
Timeliness

Reliability
Verifiable
Representational faithfulness
Neutral - free of error and bias

Second Level: Qualitative Characteristics


Secondary Qualities:

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Comparability Information that is measured


and reported in a similar manner for different
companies is considered comparable.

Consistency - When a company applies the


same accounting treatment to similar events
from period to period.

Second Level: Basic Elements


Ten interrelated elements that relate to measuring the
performance and financial status of a business enterprise.
Moment in Time
Assets
Liabilities
Equity

Period of Time

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Investment by owners
Distribution to owners
Comprehensive income
Revenue
Expenses
Gains
Losses

Third Level: Recognition and Measurement


ASSUMPTIONS

CONSTRAINTS

1. Economic entity

1. Cost-benefit

2. Going concern

2. Materiality

3. Monetary unit

3. Industry practice

4. Periodicity

PRINCIPLES
1. Measurement
2. Revenue recognition
3. Expense recognition
4. Full disclosure

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4. Conservatism

Third Level: Basic Assumptions

Economic Entity company keeps its activity separate


from its owners and other businesses.

Going Concern - company to last long enough to fulfill


objectives and commitments.

Monetary Unit - money is the common denominator.

Periodicity - company can divide its economic activities


into time periods.

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Third Level: Basic Principles


Measurement Principle The most commonly used
measurements are based on historical cost and fair value.

Issues:

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Historical cost provides a reliable benchmark for


measuring historical trends.

Fair value information may be more useful.

Recently the FASB has taken the step of giving


companies the option to use fair value as the basis for
measurement of financial assets and financial liabilities.

Reporting of fair value information is increasing.

Third Level: Basic Principles


Revenue Recognition - generally occurs (1) when realized
or realizable and (2) when earned.
Exceptions:

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Third Level: Basic Principles


Expense Recognition - Let the expense follow the
revenues.

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Third Level: Basic Principles


Full Disclosure providing information that is of sufficient
importance to influence the judgment and decisions of an
informed user.
Provided through:

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Financial Statements

Notes to the Financial Statements

Supplementary information

Third Level: Constraints

Cost Benefit the cost of providing the information must


be weighed against the benefits that can be derived from
using it.

Materiality - an item is material if its inclusion or omission


would influence or change the judgment of a reasonable
person.

Industry Practice - the peculiar nature of some industries


and business concerns sometimes requires departure from
basic accounting theory.

Conservatism when in doubt, choose the solution that


will be least likely to overstate assets and income.

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Issues
Issues in
in Financial
Financial Reporting
Reporting
Sarbanes-Oxley Act (2002)
Accounting scandals at companies like Enron, Xerox, WorldCom, etc
has resulted in the enactment of a legislation Sarbanes-Oxley Act.

This law has increased the resources for SEC to combat fraud
and curb poor reporting practices.

There are new policing efforts, codes of ethics, new auditor


independence rules and materiality guidelines for financial reporting.

There is an oversight board (PCAOB: Public Company Accounting


Oversight Board) for enforcement and establishment of auditing,
quality control and independence of standards and rules.

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Issues
Issues in
in Financial
Financial Reporting
Reporting
Expectations Gap
However, despite this legislation it is difficult to close the
Expectations Gap - what the public thinks accountants
should do vs. what accountants think they can do.
Although accounting cannot be held responsible for every
financial catastrophe, the accounting professional bodies
should continue to develop a highly transparent, clear and
reliable system for financial reporting.

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