Accounting Chapter 1 Rule 203 The Code Professional Ethics Requires

CA 1.10 (Continued)

4. The public accounting profession, through bodies such as the Accounting Principles Board,

(c) Arguments against the politicization of the accounting rule-making process:

1. Many accountants feel that accounting is primarily technical in nature. Consequently, they feel

that substantive, basic research by objective, independent and fair-minded researchers ultimately

CA 1.11

(a) The public/private mixed approach is the way rules are established in the United States. In many

respects, the FASB is a quasi-governmental agency in that its pronouncements are required to be

followed because the SEC has provided support for this approach. The SEC has the ultimate power

to establish GAAP but has chosen to permit the private sector to develop these rules. By accepting

the standards established by the FASB as authoritative, it has granted much power to the FASB.

(b) Publicly reported accounting numbers influence the distribution of scarce resources. Resources are

channeled where needed at returns commensurate with perceived risk. Thus, reported accounting

Some possible reasons why other groups might wish to establish GAAP are:

1. As indicated in the previous answer, these rules have economic effects and therefore certain

CA 1.11 (Continued)

3. Some argue that the FASB does not have the competence to legislate GAAP in certain areas.

CA 1.12

(a) AICPA. American Institute of Certified Public Accountants. The national organization of practicing

certified public accountants.

(b) CAP. Committee on Accounting Procedure. A committee of practicing CPAs which issued

51 Accounting Research Bulletins between 1939 and 1959 and is a predecessor of the FASB.

consult with the FASB on issues, project priorities, and select task forces.

(g) GAAP. Generally Aaccepted Accounting Principles. A common set of standards, principles, and

procedures which have substantial authoritative support and have been accepted as appropriate

because of universal application.

(h) CPA. Certified Public Accountant. An accountant who has fulfilled certain education and experience

requirements and passed a rigorous examination. Most CPAs offer auditing, tax, and management

consulting services to the general public.

CA 1.13

(a) Inclusion or omission of information that materially affects net income harms particular stakeholders.

Accountants must recognize that their decision to implement (or delay) reporting requirements will

have immediate consequences for some stakeholders.

CA 1.14

(a) The Securities and Exchange Commission (SEC) is an independent federal agency that receives

its authority from federal legislation enacted by Congress. The Securities and Exchange Act of

1934 created the SEC.

CA 1.15

(a) The ethical issue in this case relates to making questionable entries to meet expected earnings

forecasts. As indicated in this chapter, businesses’ concentration on “maximizing the bottom line,”

“facing the challenges of competition,” and “stressing short–term results” places accountants in an

environment of conflict and pressure.

(b) Given that Normand has pleaded guilty, he certainly acted improperly. Doing the right thing, making

CA 1.15 (Continued)

(d) Major stakeholders were: (1) Troy Normand, (2) present and potential stockholders and creditors

CA 1.16

(a) Considering the economic consequences of GAAP, it is not surprising that special interest groups

become vocal and critical (some supporting, some opposing) when rules are being formulated. The

FASB’s derivative accounting pronouncement is no exception. Many from the banking industry, for

(b) Attempting to set GAAP by a political process will probably lead to the following consequences:

(a) Too many alternatives.

CA 1.17

(a) The “due process” system involves the following:

1. Identifying topics and placing them on the Board’s agenda.

(c) Economic consequences indicated in the letter are: (1) concerns related to the potential impact

on the capital markets, (2) the weakening of companies’ ability to manage risk, and (3) the

adverse control implications of implementing costly and complex new rules imposed at the same

time as other major initiatives, including the Year 2000 issues and a single European currency.

(d) The principal point of this letter is to delay the finalization of the derivatives standard. As indicated in

the letter, the authors of this letter urge the FASB to expose its new proposal for public comment,

FINANCIAL REPORTING PROBLEM

(a) The key organizations involved in rule making in the U.S. are the AICPA,

FASB, and SEC. See also (c).

(b) Different authoritative literature pertaining to methods recording account-

ing transactions exists today. Some authoritative literature has received

(c) Rule-making in the U.S. has evolved through the work of the following

organizations:

1. American Institute of Certified Public Accountants (AICPA)—it is

the national professional organization of practicing Certified Public

2. Financial Accounting Standards Board (FASB)—the mission of the

FINANCIAL REPORTING PROBLEM (Continued)

3. Securities and Exchange Commission (SEC)—the SEC is an inde-

pendent regulatory agency of the United States government which

administers the Securities Act of 1933, the Securities Exchange Act

of 1934, the Sarbanes-Oxley Act, and several other acts. The SEC

SOLUTIONS TO CODIFICATION EXERCISES

CE1.1

The information at this link describes the elements offered in The FASB Accounting Standards

Codification. As indicated, the website offers several resources to enhance your working knowledge of

CE1.2

The following information is provided at the Providing Feedback link:

The Codification includes a feature which can be used to submit content-related feedback or general,

system-related comments. The feedback system is not designed for comments on proposed

Accounting Standards Updates.

Content-related feedback

To provide content-related feedback:

Click the Submit feedback button beneath the paragraph for which you want to provide feedback. Enter

General feedback

CE1.3

The “What’s New” page provides links to Codification content that has been recently issued. During the

RESEARCH CASE

(a) CON 1, Par. 32. The objectives begin with a broad focus on information

that is useful in investment and credit decisions; then narrow that focus

(b) CON 1, Par. 7. Financial 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

system—that is, information about an enterprise’s resources, obligations,

(c) CON 1, Par, 24 and 25: 24. Many people base economic decisions on

their relationships to and knowledge about business enterprises and

RESEARCH CASE (Continued)

legislators, financial press and reporting agencies, labor unions, trade

associations, business researchers, teachers and students, and the

public. Members and potential members of some groups—such as

Potential users of financial information most directly concerned with a

particular business enterprise are generally interested in its ability to

generate favorable cash flows because their decisions relate to amounts,

timing, and uncertainties of expected cash flows. To investors, lenders,

suppliers, and employees, a business enterprise is a source of cash in

the form of dividends or interest and perhaps appreciated market prices,

repayment of borrowing, payment for goods or services, or salaries or

IFRS CONCEPTS AND APPLICATION

IFRS 1.1

The two organizations involved in international standard-setting are IOSCO

(International Organization of Securities Commissions) and the IASB

IFRS 1.2

The standards issued by these organizations are sometimes principles–

IFRS 1.3

A single set of high quality accounting standards ensures adequate

IFRS 1.4

The international standards must be of high quality and sufficiently

comprehensive. To achieve this goal, the IASB and the FASB have set up

IFRS 1.4 (Continued)

At that meeting, the FASB and the IASB pledged to use their best efforts to

(1) make their existing financial reporting standards fully compatible as

soon as is practicable, and (2) coordinate their future work programs to

ensure that once achieved, compatibility is maintained. This document was

reinforced in 2006 when the parties issued a memorandum of understanding

(MOU) which highlighted three principles:

• Convergence of accounting standards can best be achieved

through the development of high-quality common standards over

time.

Subsequently, in 2009 the Boards agreed on a process to complete a

number of major projects by 2011, including monthly joint meetings. As

part of achieving this goal, it is critical that the process by which the

standards are established be independent. And, it is necessary that the

standards are maintained, and emerging accounting issues are dealt with

efficiently.

IFRS 1.5

(a) The International Accounting Standards Board is an independent, pri–

vately funded accounting standards setter based in London, UK. The

(b) In summary, the following groups might gain most from convergence

of financial reporting:

• Investors, investment analysts and stockbrokers: to facilitate interna–

tional comparisons for investment decisions.

(c) The fundamental argument against convergence is that, to the extent

that international differences in accounting practices result from under-

lying economic, legal, social, and other environmental factors, harmoni–

IFRS1.5 (Continued)

The most obvious obstacle to harmonization is the sheer size and deep

IFRS 1.6

(a) “IFRS Framework OB2 The objective of general purpose financial

reporting is to provide financial information about the reporting entity

that is useful to existing and potential investors, lenders and other

creditors in making decisions about providing resources to the entity.

IFRS1.6 (Continued)

(c) As indicated in the introduction to the IFRS framework, financial

statements prepared to meet the objective of financial reporting meet

the common needs of most users. However, financial statements do

IFRS1.7

(a) Operating retail stores (clothing, home, and food).

(b) Operations are primarily in the UK, Belgium, Canada, China, Czech

Republic, Estonia, France. Greece, Hong Kong, Hungary, India,