Chapter 1 Homework Have Been The Authority For Compliance

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.

(g) SOP. Statements of Position. Statements issued by the AICPA (through the Accounting Standards

Executive Committee of its Accounting Standards Division) which are generally devoted to emerging

problems not addressed by the FASB or the SEC.

(h) GAAP. Generally accepted accounting principles. A common set of standards, principles, and

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

CA 1-13

1. (b), (e)

CA 1-14

1. (d)

CA 1-15

(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 1-16

(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.

1-20

CA 1-17

(a) The process by which a topic is selected or identified as appropriate for study by the Financial

Accounting Standards Board (FASB) is described below.

• Problems or issues come to the attention of the FASB from

– the Emerging Issues Task Force which may identify significant emerging accounting issues

that it feels the FASB should address.

(b) Once a topic is considered appropriate for consideration by the FASB, major steps in the process

leading to the issuance of a Statement of Financial Accounting Standards include the following:

• Research and analysis is conducted by the FASB Technical Staff.

• A preliminary views is drafted and released for written comments.

CA 1-17 (Continued)

(c) At least three other organizations who can influence the setting of generally accepted accounting

principles include the

CA 1-18

(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.

CA 1-19

(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

1-22

CA 1-19 (Continued)

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

(a) Too many alternatives.

(b) Lack of clarity that will lead to inconsistent application.

CA 1-20

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

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

2. Research and analysis is conducted and preliminary views of pros and cons issued.

FINANCIAL REPORTING PROBLEM

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

FASB, and SEC. See also (c).

With implementation of the Codification, what qualifies as authoritative is

any literature contained in the Codification. The Codification changes

the way GAAP is documented, presented, and updated. It creates one

level of GAAP which is considered authoritative. All other accounting

literature is considered non-authoritative.

(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

Accountants (CPAs). Outgrowths of the AICPA have been the Com-

mittee on Accounting Procedure (CAP) which issued Accounting

1-24

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

1-25

PROFESSIONAL RESEARCH

(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

to investors’ and creditors’ primary interest in the prospects of receiving

earnings, etc. Management may communicate information to those

outside an enterprise by means of financial reporting other than formal

financial statements either because the information is required to be

disclosed by authoritative pronouncement, regulatory rule, or custom or

because management considers it useful to those outside the enterprise

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

their relationships to and knowledge about business enterprises and

thus are potentially interested in the information provided by financial

reporting. Among the potential users are owners, lenders, suppliers,

potential investors and creditors, employees, management, directors,

1-26

PROFESSIONAL RESEARCH (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

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

wages. They invest cash, goods, or services in an enterprise and expect

decisions have cash flow consequences for the enterprise. Thus,

investors, creditors, employees, customers, and managers significantly

share a common interest in an enterprise’s ability to generate favorable

cash flows. Other potential users of financial information share the

same interest, derived from investors, creditors, employees, customers,

or managers whom they advise or represent or derived from an interest

in how those groups (and especially stockholders) are faring.

1-27

PROFESSIONAL SIMULATION

(a) The term “accounting principles” in the auditor’s report includes not

only accounting principles but also the practices and the methods of

applying them. Although the term quite naturally emphasizes the pri–

mary or fundamental character of some principles, it includes general

rules adopted or professed as guides to action in practice. The term

(b) Generally accepted accounting principles are those principles (whether

or not they have only limited usage) that have substantial authoritative

support. Whether a given principle has authoritative support is a

question of fact and a matter of judgment. The CPA is responsible for

collecting the available evidence of authoritative support and judging

whether it is sufficient to bring the practice within the bounds of

generally accepted accounting principles.

1-28

PROFESSIONAL SIMULATION (Continued)

For example, other evidence of authoritative support may be found in the

published opinions of the committees of the American Accounting Asso–

ciation and the affirmative opinions of practitioners and academicians

1-29

IFRS CONCEPTS AND APPLICATIONS

IFRS 1-1

The two organizations involved in international standard-setting are IOSCO

(International Organization of Securities Commissions) and the IASB

(International Accounting Standards Board.) The IOSCO does not set

IFRS 1-2

The standards issued by these organizations are sometimes principles–

based, rules-based, tax-oriented, or business-based. In other words, they

often differ in concept and objective.

IFRS 1-3

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

an extensive work plan to achieve the objective of developing one set of

1-30

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:

jointly developed new standards.

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.

1-31

IFRS 1-5

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

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

Board is committed to developing, in the public interest, a single set of

(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-

zation may not be justified. Different accounting has grown up to serve the

different needs of different users; this might suggest that the existing ac–

1-32

IFRS1-5 (Continued)

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

IFRS 1-6

(a) As indicated in paragraph 12 of the Framework, “The objective of

financial statements is to provide information about the financial

position, performance and changes in financial position of an entity

that is useful to a wide range of users in making economic decisions.”

(c) As indicated in paragraphs 13 and 14, financial statements prepared to

meet the objective of financial reporting meet the common needs of

most users. However, financial statements do not provide all the

information that users may need to make economic decisions since they

1-33

IFRS1-7

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