Chapter 1 The public/private mixed approach appears to be the

CA 1-10 (Continued)

(c) Arguments against the politicalization 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

will 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 “right” solution.

CA 1-11

(a) The public/private mixed approach appears to be 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

(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

(c) The Accounting Standards Executive Committee (AcSEC of the AICPA), among other groups, has

presented a potential challenge to the exclusive right of the FASB to establish accounting principles.

Also, Congress has been attempting to legislate certain accounting practices, particularly to help

struggling industries.

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 1-12

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

certified public accountants.

(e) FAF. Financial Accounting Foundation. An organization whose purpose is to select members of

the FASB and its Advisory Councils, fund their activities, and exercise general oversight.

(f) FASAC. Financial Accounting Standards Advisory Council. An organization whose purpose is to

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

(i) 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.

(j) FASB. Financial Accounting Standards Board. The primary body which currently establishes and

improves financial accounting and reporting standards for the guidance of issuers, auditors, users,

and others.

CA 1-13

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

CA 1-13 (Continued)

(c) The accountant’s responsibility is to provide financial statements that present fairly the financial

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.

(c) No doubt, Normand was in a difficult position. I am sure that he was concerned that if he failed to

go along, it would affect his job performance negatively or that he might be terminated. These job

pressures, time pressures, peer pressures often lead individuals astray. Can it happen to you?

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.

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

CA 1-17

(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.

(b) Economic consequences mean the impact of accounting reports on the wealth positions of issuers

and users of financial information and the decision-making behavior resulting from that impact.

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

CA 1-17 (Continued)

and providing sufficient time for affected parties to understand and assess the new approach.

(Authors note: The FASB indicated in a follow-up letter that all due process procedures had been

followed and all affected parties had more than ample time to comment. In addition, the FASB issued

a follow-up standard, which 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).

(e) The reason why the letter was sent to Congress was to put additional pressure on the FASB to delay

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–

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

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

FASB is to establish and improve standards of financial accounting

FINANCIAL REPORTING PROBLEM (Continued)

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

pendent regulatory agency of the United States government which

(d) The SEC and the AICPA have been the authority for compliance with

GAAP. The SEC has indicated that financial statements conforming to

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

(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,

earnings, etc. Management may communicate information to those

outside an enterprise by means of financial reporting other than formal

(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

PROFESSIONAL RESEARCH (Continued)

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,

only by obtaining sufficient cash to pay for the resources it uses and to

meet its other obligations can the enterprise provide those goods or

services. To managers, the cash flows of a business enterprise are a

significant part of their management responsibilities, including their

accountability to directors and owners. Many, if not most, of their

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.

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

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

The SEC has directed its staff to develop and execute a plan (“Work Plan”)

to enhance both the understanding of the SEC’s purpose and public

transparency in this area. Execution of the Work Plan (which addresses

such areas as independence of standard-setting, investor understanding of

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

(b) According to paragraph 21 of the Framework, notes and supplementary

schedules serve in this role. For example, they may contain additional

(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

IFRS1-7

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

(b) Operations are primarily in the UK, China, Czech Republic, Greece,

Hungary, India, Indonesia, Jersey, Kuwait, Latvia, Lithuania, Malaysia,