Question & Answer

As a newly enrolled accounting major, you are anxious to better understand accounting institutions and sources of accounting literature. As a first step, you decide to explore the IASB’s Framework for the Preparation and Presentation of Financial Statements.

Instructions

Access the IASB Framework at the IASB website (http://eifrs.iasb.org/ ). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following items. (Provide paragraph citations.)

(a) What is the objective of financial reporting?

(b) What other means are there of communicating information, besides financial statements?

(c) Indicate some of the users and the information they are most directly concerned with in economic decision-making.

The following comments were made at an Annual Conference of the Financial Executives Institute

(FEI). There is an irreversible movement toward the harmonization of financial reporting throughout the world. The international capital markets require an end to:

1. The confusion caused by international companies announcing different results depending on the set of accounting standards applied.

2. Companies in some countries obtaining unfair commercial advantages from the use of particular national accounting standards.

3. The complications in negotiating commercial arrangements for international joint ventures caused by different accounting requirements.

4. The inefficiency of international companies having to understand and use a myriad of different accounting standards depending on the countries in which they operate and the countries in which they raise capital and debt. Executive talent is wasted on keeping up to date with numerous sets of accounting standards and the never-ending changes to them.

5. The inefficiency of investment managers, bankers, and financial analysts as they seek to compare financial reporting drawn up in accordance with different sets of accounting standards.

Instructions

(a) What is the International Accounting Standards Board?

(b) What stakeholders might benefit from the use of International Accounting Standards?

(c) What do you believe are some of the major obstacles to convergence?

Briefly describe FASB/IASB convergence process and the principles that guide their convergence efforts.

What might explain the fact that different accounting standard-setters have developed accounting standards that are sometimes quite different in nature?

What is the benefit of a single set of high-quality accounting standards?

Who are the two key international players in the development of international accounting standards? Explain their role.

As a newly enrolled accounting major, you are anxious to better understand accounting institutions and sources of accounting literature. As a first step, you decide to explore the FASB Conceptual Framework.

Instructions

Go to the FASB website, http://www.fasb.org, to access the FASB Concepts Statements. When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following items. (Provide paragraph citations.)

(a) What is the objective of financial reporting?

(b) What other means are there of communicating information, besides financial statements?

(c) Indicate some of the users and the information they are most directly concerned with in economic decision-making.

The following letter was sent to the SEC and the FASB by leaders of the business community.

Dear Sirs:

The FASB has been struggling with accounting for derivatives and hedging for many years. The FASB has now developed, over the last few weeks, a new approach that it proposes to adopt as a final standard.

We understand that the Board intends to adopt this new approach as a final standard without exposing it for public comment and debate, despite the evident complexity of the new approach, the speed with which it has been developed and the significant changes to the exposure draft since it was released more than one year ago. Instead, the Board plans to allow only a brief review by selected parties, limited to issues of operationality and clarity, and would exclude questions as to the merits of the proposed approach.

As the FASB itself has said throughout this process, its mission does not permit it to consider matters that go beyond accounting and reporting considerations. Accordingly, the FASB may not have adequately considered the wide range of concerns that have been expressed about the derivatives and hedging proposal, including concerns related to the potential impact on the capital markets, the weakening of companies’ ability to manage risk, and 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. We believe that these crucial issues must be considered, if not by the FASB, then by the Securities and Exchange Commission, other regulatory agencies, or Congress.

We believe it is essential that the FASB solicit all comments in order to identify and address all material issues that may exist before issuing a final standard. We understand the desire to bring this process to a prompt conclusion, but the underlying issues are so important to this nation’s businesses, the customers they serve and the economy as a whole that expediency cannot be the dominant consideration.

As a result, we urge the FASB to expose its new proposal for public comment, following the established due process procedures that are essential to acceptance of its standards, and providing sufficient time to affected parties to understand and assess the new approach.

We also urge the SEC to study the comments received in order to assess the impact that these proposed rules may have on the capital markets, on companies’ risk management practices, and on management and financial controls. These vital public policy matters deserve consideration as part of the Commission’s oversight responsibilities.

We believe that these steps are essential if the FASB is to produce the best possible accounting standard while minimizing adverse economic effects and maintaining the competitiveness of U.S. businesses in nthe international marketplace.

Very truly yours,

(This letter was signed by the chairs of 22 of the largest U.S. companies.)

Instructions

Answer the following questions.

(a) Explain the “due process” procedures followed by the FASB in developing a financial reporting standard.

(b) What is meant by the term “economic consequences” in accounting standard-setting?

(c) What economic consequences arguments are used in this letter?

(d) What do you believe is the main point of the letter?

(e) Why do you believe a copy of this letter was sent by the business community to influential members of the U.S. Congress?

Presented below are comments made in the financial press.

Instructions

Prepare responses to the requirements in each item.

(a) Rep. John Dingell, at one time the ranking Democrat on the House Commerce Committee, threw his support behind the FASB’s controversial derivatives accounting standard and encouraged the FASB to adopt the rule promptly. Indicate why a member of Congress might feel obligated to comment on this proposed FASB standard.

(b) In a strongly worded letter to Senator Lauch Faircloth (R-NC) and House Banking Committee

Chairman Jim Leach (R-IA), the American Institute of Certified Public Accountants (AICPA) cautioned against government intervention in the accounting standard-setting process, warning that it had the potential of jeopardizing U.S. capital markets. Explain how government intervention could possibly affect capital markets adversely.

Presented below is abbreviated testimony from Troy Normand in the WorldCom case. He was a manager in the corporate reporting department and is one of five individuals who pleaded guilty. He is testifying in hopes of receiving no prison time when he is ultimately sentenced.

Q. Mr. Normand, if you could just describe for the jury how the meeting started and what was said during the meeting?

A. I can’t recall exactly who initiated the discussion, but right away Scott Sullivan acknowledged that he was aware we had problems with the entries, David Myers had informed him, and we were considering resigning.

He said that he respected our concerns but that we weren’t being asked to do anything that he believed was wrong. He mentioned that he acknowledged that the company had lost focus quite a bit due to the preparations for the Sprint merger, and that he was putting plans in place and projects in place to try to determine where the problems were, why the costs were so high.

He did say he believed that the initial statements that we produced, that the line costs in those statements could not have been as high as they were, that he believed something was wrong and there was no way that the costs were that high.

I informed him that I didn’t believe the entry we were being asked to do was right, that I was scared, and I didn’t want to put myself in a position of going to jail for him or the company. He responded that he didn’t believe anything was wrong, nobody was going to be going to jail, but that if it later was found to be wrong, that he would be the person going to jail, not me.

He asked that I stay, don’t jump off the plane, let him land it softly, that’s basically how he put it. And he mentioned that he had a discussion with Bernie Ebbers, asking Bernie to reduce projections going forward and that Bernie had refused.

Q. Mr. Normand, you said that Mr. Sullivan said something about don’t jump out of the plane. What did you understand him to mean when he said that?

A. Not to quit.

Q. During this meeting, did Mr. Sullivan say anything about whether you would be asked to make entries like this in the future?

A. Yes, he made a comment that from that point going forward we wouldn’t be asked to record any entries, high-level late adjustments, that the numbers would be the numbers.

Q. What did you understand that to be mean, the numbers would be the numbers?

A. That after the preliminary statements were issued, with the exception of any normal transaction, valid transaction, we wouldn’t be asked to be recording any more late entries.

Q. I believe you testified that Mr. Sullivan said something about the line cost numbers not being accurate.

Did he ask you to conduct any analysis to determine whether the line cost numbers were accurate?

A. No, he did not.

A. No.

Q. Did you ever conduct any such analysis?

A. No, I didn’t.

Q. During this meeting, did Mr. Sullivan ever provide any accounting justification for the entry you were asked to make?

A. No, he did not.

Q. Did anything else happen during the meeting?

A. I don’t recall anything else.

Q. How did you feel after this meeting?

A. Not much better actually. I left his office not convinced in any way that what we were asked to do was right. However, I did question myself to some degree after talking with him wondering whether I was making something more out of what was really there.

Instructions

Answer the following questions.

(a) What appears to be the ethical issue involved in this case?

(b) Is Troy Normand acting improperly or immorally?Q. Did anyone ever ask you to do that?

(c) What would you do if you were Troy Normand?

(d) Who are the major stakeholders in this case?

The U.S. Securities and Exchange Commission (SEC) was created in 1934 and consists of five commissioners and a large professional staff. The SEC professional staff is organized into five divisions and several principal offices. The primary objective of the SEC is to support fair securities markets. The SEC also strives to foster enlightened stockholder participation in corporate decisions of publicly traded companies. The SEC has a significant presence in financial markets, the development of accounting practices, and corporation-shareholder relations, and has the power to exert influence on entities whose actions lie within the scope of its authority.

Instructions

(a) Explain from where the Securities and Exchange Commission receives its authority.

(b) Describe the official role of the Securities and Exchange Commission in the development of financial accounting theory and practices.

(c) Discuss the interrelationship between the Securities and Exchange Commission and the Financial

Accounting Standards Board with respect to the development and establishment of financial accounting theory and practices.

When the FASB issues new pronouncements, the implementation date is usually 12 months from date of issuance, with early implementation encouraged. Karen Weller, controller, discusses with her financial vice president the need for early implementation of a rule that would result in a fairer presentation of the company’s financial condition and earnings. When the financial vice president determines that early implementation of the rule will adversely affect the reported net income for the year, he discourages Weller from implementing the rule until it is required.

Instructions

Answer the following questions.

(a) What, if any, is the ethical issue involved in this case?

(b) Is the financial vice president acting improperly or immorally?

(c) What does Weller have to gain by advocacy of early implementation?

(d) Which stakeholders might be affected by the decision against early implementation?

Wayne Rogers, an administrator at a major university, recently said, “I’ve got some CDs in my IRA, which I set up to beat the IRS.” As elsewhere, in the world of accounting and finance, it often helps to be fluent in abbreviations and acronyms.

Instructions

Presented below is a list of common accounting acronyms. Identify the term for which each acronym stands, and provide a brief definition of each term.

(a) AICPA (e) FAF (i) CPA

(b) CAP (f) FASAC (j) FASB

(c) ARB (g) SOP (k) SEC

(d) APB (h) GAAP (l) IASB

Presented below are three models for setting GAAP.

1. The purely political approach, where national legislative action decrees GAAP.

2. The private, professional approach, where GAAP is set and enforced by private professional actions only.

3. The public/private mixed approach, where GAAP is basically set by private-sector bodies that behave as though they were public agencies and whose standards to a great extent are enforced through governmental agencies.

Instructions

(a) Which of these three models best describes standard-setting in the United States? Comment on your answer.

(b) Why do companies, financial analysts, labor unions, industry trade associations, and others take such an active interest in standard-setting?

(c) Cite an example of a group other than the FASB that attempts to establish accounting standards.

Speculate as to why another group might wish to set its own standards.

Some accountants have said that politicization in the development and acceptance of generally accepted accounting principles (i.e., rule-making) is taking place. Some use the term “politicization” in a narrow sense to mean the influence by governmental agencies, particularly the Securities and Exchange Commission, on the development of generally accepted accounting principles.

Others use it more broadly to mean the compromise that results when the bodies responsible for developing generally accepted accounting principles are pressured by interest groups (SEC, American Accounting Association, businesses through their various organizations, Institute of Management Accountants, financial analysts, bankers, lawyers, and so on).

Instructions

(a) The Committee on Accounting Procedure of the AICPA was established in the mid- to late 1930s and functioned until 1959, at which time the Accounting Principles Board came into existence. In

1973, the Financial Accounting Standards Board was formed and the APB went out of existence.

Do the reasons these groups were formed, their methods of operation while in existence, and the reasons for the demise of the first two indicate an increasing politicization (as the term is used in the broad sense) of accounting standard-setting? Explain your answer by indicating how the CAP, the APB, and the FASB operated or operate. Cite specific developments that tend to support your answer.

(b) What arguments can be raised to support the “politicization” of accounting rule-making?

(c) What arguments can be raised against the “politicization” of accounting rule-making?

A press release announcing the appointment of the trustees of the new Financial Accounting Foundation stated that the Financial Accounting Standards Board (to be appointed by the trustees) “. . . will become the established authority for setting accounting principles under which corporations report to the shareholders and others” (AICPA news release July 20, 1972).

Instructions

(a) Identify the sponsoring organization of the FASB and the process by which the FASB arrives at a decision and issues an accounting standard.

(b) Indicate the major types of pronouncements issued by the FASB and the purposes of each of these pronouncements.

One of the major groups that has been involved in the standardsetting process is the American Institute of Certified Public Accountants. Initially, it was the primary organization that established accounting principles in the United States. Subsequently, it relinquished its power to the FASB.

Instructions

(a) Identify the two committees of the AICPA that established accounting principles prior to the establishment of the FASB.

(b) Speculate as to why these two organizations failed. In your answer, identify steps the FASB has

taken to avoid failure.

(c) What is the present role of the AICPA in the rule-making environment?

Some argue that having various organizations establish accounting principles iswasteful and inefficient. Rather than mandating accounting rules, each company could voluntarily disclosethe type of information it considered important. In addition, if an investor wants additional information, the investor could contact the company and pay to receive the additional information desired.

Instructions

Comment on the appropriateness of this viewpoint.

Hardly a day goes by without an article appearing on the crises affecting many of our financial institutions in the United States. It is estimated that the savings and loan (S&L) debacle of the 1980s, for example, ended up costing $500 billion ($2,000 for every man, woman, and child in the United States). Some argue that if the S&Ls had been required to report their investments at fair value instead of cost, large losses would have been reported earlier, which would have signaled regulators to close those S&Ls and, therefore, minimize the losses to U.S. taxpayers.

Instructions

Explain how reported accounting numbers might affect an individual’s perceptions and actions. Cite two

examples.

Karen Sepan, a recent graduate of the local state university, ispresently employed by a large manufacturing company. She has been asked by Jose Martinez, controller, toprepare the company’s response to a current Preliminary Views published by the Financial Accounting Standards Board (FASB). Sepan knows that the FASB has a conceptual framework, and she believes that these concept statements could be used to support the company’s response to the Preliminary Views. She has prepared a rough draft of the response citing the objective of financial reporting.

Instructions

(a) Identify the objective of financial reporting.

(b) Describe the level of sophistication expected of the users of financial information by the objective of

financial reporting.

Omar Morena has recently completed his first year of studying accounting.

His instructor for next semester has indicated that the primary focus will be the area of financial accounting. Instructions

(a) Differentiate between financial accounting and managerial accounting.

(b) One part of financial accounting involves the preparation of financial statements. What are the

financial statements most frequently provided?

(c) What is the difference between financial statements and financial reporting?

Answer the following multiple-choice questions.

1. GAAP stands for:

(a) governmental auditing and accounting practices.

(b) generally accepted attest principles.

(c) government audit and attest policies.

(d) generally accepted accounting principles.

2. Accounting standard-setters use the following process in establishing accounting standards:

(a) Research, exposure draft, discussion paper, standard.

(b) Discussion paper, research, exposure draft, standard.

(c) Research, preliminary views, discussion paper, standard.

(d) Research, discussion paper, exposure draft, standard.

3. GAAP is comprised of:

(a) FASB standards, interpretations, and concepts statements.

(b) FASB financial standards.

(c) FASB standards, interpretations, EITF consensuses, and accounting rules issued by FASB predecessor

organizations.

(d) any accounting guidance included in the FASB Codification.

4. The authoritative status of the conceptual framework is as follows.

(a) It is used when there is no standard or interpretation related to the reporting issues under

consideration.

(b) It is not as authoritative as a standard but takes precedence over any interpretation related to

the reporting issue.

(c) It takes precedence over all other authoritative literature.

(d) It has no authoritative status.

5. The objective of financial reporting places most emphasis on:

(a) reporting to capital providers.

(b) reporting on stewardship.

(c) providing specific guidance related to specific needs.

(d) providing information to individuals who are experts in the field.

6. General-purpose financial statements are prepared primarily for:

(a) internal users.

(b) external users. (c) auditors.

(d) government regulators.

7. Economic consequences of accounting standard-setting means:

(a) standard-setters must give first priority to ensuring that companies do not suffer any adverse

effect as a result of a new standard.

(b) standard-setters must ensure that no new costs are incurred when a new standard is issued.

(c) the objective of financial reporting should be politically motivated to ensure acceptance by the

general public.

(d) accounting standards can have detrimental impacts on the wealth levels of the providers of

financial information.

8. The expectations gap is:

(a) what financial information management provides and what users want.

(b) what the public thinks accountants should do and what accountants think they can do.

(c) what the governmental agencies want from standard-setting and what the standard-setters provide.

(d) what the users of financial statements want from the government and what is provided.

Presented below are four statements which you are to identify as

true or false. If false, explain why the statement is false.

1. The objective of financial statements emphasizes a stewardship approach for reporting financial

information.

2. The purpose of the objective of financial reporting is to prepare a balance sheet, an income statement,

a statement of cash flows, and a statement of owners’ or stockholders’ equity.

3. Because they are generally shorter, FASB interpretations are subject to less due process, compared

to FASB standards.

4. The objective of financial reporting uses an entity rather than a proprietary approach in determining

what information to report.

(FASB and Standard-Setting) Presented below are four statements which you are to identify as

true or false. If false, explain why the statement is false.

1. GAAP is the term used to indicate the whole body of FASB authoritative literature.

2. Any company claiming compliance with GAAP must comply with most standards and interpretations

but does not have to follow the disclosure requirements.

3. The primary governmental body that has influence over the FASB is the SEC.

4. The FASB has a government mandate and therefore does not have to follow due process in issuing

a standard

How are financial accountants challenged in their work tomake ethical decisions? Is technical mastery of GAAP not sufficient to the practice of financial accounting?