ACG6295
Please do not leave the classroom
while class is in session.
ACG6295
Interviewed 50 partners in Miami and asked
What are the strengths and
weaknesses of the average FIU
MACC graduate?
Strength or Weakness?
•
•
•
•
•
•
•
•
•
•
Technical Competence
Work Ethic
Ability to prioritize
Communications skills
Know how to stay current
Involvement in ALFPA and Beta
Willingness to leave Miami
Positive attitude
Attention to detail
Spreadsheet skills
MACC Graduates
Strengths
Weaknesses
Ability to prioritize
Communications skills
Technical competence
Know how to stay current
Work Ethic
Involvement in ALPHA and Beta
Positive attitude
Willingness to leave Miami
Attention to detail
Spreadsheet skills
We will address currency
and communications
• The objectives of this course include:
– Evaluate current Exposure Drafts related to
financial reporting and explain, if fully
implemented, why they will affect financial
transparency.
– Explain and interpret changes to the Codification.
– Assess the decision usefulness of technical
pronouncements under consideration for
adoption.
– Communicate technically advanced information
Financial Reporting
• Our perspective is external financial reporting using
financial statements prepared under US GAAP
• The primary objective of external financial reporting
under US GAAP is to provide information that is useful to
investors, creditors and others in making future decisions
• We prepare the statements such that a reasonably
educated consumer exercising due diligence will
understand them
• We should also consider the transparency of the
information we provide in the financial statements
6
Development of
Accounting Standards
• Prior to the US stock market crash of 1933/34, little
financial reporting was required and regulation
concerning financial information was nonexistent
• The SEC Act of 1934:
– Formed the SEC and gave it the power to make the rules
for accounting and for financial reporting
– Required most publicly held firms to undergo an audit by
independent CPAs
7
Who Sets the Standards?
• The SEC (a public sector entity) delegated rule
making authority to the AICPA (a private sector
entity).
– AICPA formed subcommittees called Committee on
Accounting Procedure (CAP) and later Accounting
Principles Board (APB) to write standards
– When accounting issues became too complex for a part
time committee, the Financial Accounting Standards Board
(FASB) was established
– The SEC maintains enforcement and provides Staff
Accounting Bulletins that interpret FASB standards
8
Who Sets the Standards?
• Accounting standards are written in the private sector,
but the SEC provides public oversight for the standards
– FASB, with SEC oversight, writes the standards for external
financial reporting
– The SEC identifies areas in which additional information is
needed and may request additional information from
registrants
– The SEC also sets standards for registrant filings such as the
10K, 10Q, and others
• If individual firms submit statements with
“irregularities”, SEC issues deficiency letter with issues
that must be resolved
9
Who Sets the Standards?
• In summary, many groups have been involved in
writing and interpreting standards
– FASB, its governmental group GASB, and its Emerging Issues
Task Force (EITF)
– AICPA created a group called the Accounting Standards
Executive Committee (AcSEC) to ensure a voice in the process.
They also provide information about regulatory matters (
http://www.aicpa.org/sarbanes/index.asp ) and CPA licensure
– SEC provides oversight
(http://www.sec.gov/about/offices/oca.htm)
– Congress provides political pressure when FASB makes
unpopular rulings
10
US Generally Accepted Accounting
Principles (GAAP)
• “GAAP” is a technical term that encompasses the conventions,
rules, and procedures necessary to define accepted accounting
practice at a particular time
• It includes not only broad guidelines of general application, but
also detailed practices and procedures. Those conventions,
rules, and procedures provide a standard by which to measure
financial presentations
• GAAP is presented as a hierarchy of guidance.
• Sometimes, the guidance from one source contradicts guidance
from another source.
11
FAS 162 – Issued May, 2008
• The sources of accounting principles that are generally accepted are
categorized in descending order of authority as defined by Financial
Accounting Standard (FAS) 162:
– Category A
• Statements of Financial Accounting Standards (FAS) and
Interpretations (FIN)
• AICPA Accounting Research Bulletins (ARB) and Accounting
Principles Board (APB) Opinions that are not superseded by action
of the FASB
• Derivatives Implementation Group Issues (DIG)
• FASB Staff Positions (FSP)
• U.S. Securities and Exchange Commission Staff Accounting
Bulletins (SAB)
12
FAS 162 - continued
• The sources of accounting principles that are generally
accepted are categorised in descending order of authority as
follows:
– Category B
• FASB Technical Bulletins
• AICPA Industry Audit and Accounting Guides *
• AICPA Statements of Position *
* If cleared by the FASB
13
FAS 162 - continued
– Category C
• AICPA Accounting Standards Executive Committee Practice
Bulletins that have been cleared by the FASB and
• Consensus positions of the FASB Emerging Issues Task
Force (EITF)
– often deal with issues not explicitly covered elsewhere
14
FAS 162
– Category D
• Implementation guides (Q&As) published by the FASB staff
• AICPA accounting interpretations
• Practices that are widely recognised and prevalent either
generally or in the industry
15
16
Applying the Hierarchy
Before July 1, 2009
•
Compliance with category A items is mandatory
•
Auditors may not express an unqualified opinion if there is a
material departure from category A
•
If a treatment is not specified in category A proceed to categories
B, C, or D using the treatment specified by the source in the
highest category
•
If a prescribed treatment in category B, C, or D is relevant to the
circumstances, that treatment must be followed unless there is
justification that another treatment is generally accepted
17
Applying Guidance after
July 1, 2009
• Confusion about the hierarchy, along with the
presumed convergence of US GAAP and
International Financial Accounting Standards
(IFRS) led to a new system
• FASB has codified all guidance.
18
www.fasb.org
19
Sign in to access the Codification
• Look for the link to the Codification on the
right hand side of the page (blue arrow on
prior slide)
• Click for free student access to the
Codification.
20
You should then see:
21
Click on “Academic User”
• We provide you with free access to the
Codification only while you are a student.
• Your user name is:
• Your password is:
22
You will see:
23
Go to the bottom
of the page to see:
24
Click on Registered User to see:
25
User Name and Password
• Your user name is: AAA52091
• Your password is: FvLxvv9
• Click on the link for the Codification. You will
then see the screen on the next slide.
26
Codification Site
27
Navigating the Codification
• Look at the list on the left side of the page
• This is the navigation panel for all US GAAP
authoritative guidance
• Go to Revenue Recognition, Codification
section 605
28
Codification Layout
29
Expanded Layout
30
Referencing US GAAP
• Your text, your professors and your employers
will probably use some mix of the old way of
referencing (i.e., FAS 133) and the Codification
method of referencing
• You can cross reference by using the cross
reference tool on the codification site
31
Note that FAS 133 cross references
with Cod topic 815
32
Codification Standard
Section Structure
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Status (References to standards affecting the subtopic)
Overview and Background
Objectives
Scope and Scope Exceptions
Topical Definitions / Glossary
XBRL Definitions
Recognition
Initial Measurement
Subsequent Measurement
De-recognition
Presentation matters
Disclosure
Implementation guidance and illustrations
Relationships
Transition and Open Effective Date Information
Links to Grandfathered Material
33
Example: Status of a Given
Pronouncement
Topic:
Extractive Activities – Oil and Gas
Subtopic: Property, Plant and Equipment
Section:
Status
Affected by Codification Update Instructions contained in:
XXX.XX.XX paragraph 7 modified by FASB Statement YYY
XXX.XX.XX paragraph 3 modified by Financial Staff Position
XXX.XX.XX paragraph 9 modified by EITF Issue BB-CC
34
Overview and Background
• Overview and background will contain material generally considered
useful to a user in understanding typical situations required by the
standard.
• Example from Oil and Gas topic:
• This Subtopic establishes standards of financial accounting and
reporting for the oil and gas producing activities of a business entity.
Those activities involve the acquisition of mineral interest in
properties, exploration (including prospecting), development, and
production of crude oil, including condensate and natural gas liquids,
and natural gas.
35
Objectives
• The Objectives section will state the high-level
objectives that the subtopic is trying to
accomplish or attain.
36
Scope and Scope Exceptions
• Below is an illustrative structure of a Scope section of the Overall
subtopic of Extractive Activities — Oil and Gas:
• Overall guidance: “The Subtopics within Extractive Activities—Oil and
Gas Topic provide incremental industry guidance for the entities
defined in the Scope Section. Entities within the scope of this industry
shall also apply the applicable standards not included in this Topic.”
• Entity-based scope: “This Topic applies only to entities with oil and gas
producing activities.”
• Transactions: This will several types of transactions that are excluded
from the scope of this topic.
37
Topical Definitions / Glossary
• This section contains a definition of the terms
specific to the topic and would include the
definitions of words like: proved oil and gas
reserves, reservoir, field, service well, and
others.
• The goal is to have one glossary for all of the
codification
38
XBRL – Extensible Business Reporting
Language
• XBRL taxonomy announced 2008.
– A system of data tags, to enable the viewer to
rearrange, summarize financial data in alternative
formats.
• Interactive XBRL viewer:
– www.sec.gov/xbrl
39
Recognition
• Recognition generally addresses when a
transaction is recorded
• Cod 932-360-25-4 is an example of
recognition.
• “An enterprise’s oil and gas producing
activities involve certain special types of
assets. Costs of those assets shall be
capitalized when incurred…”
40
Initial Measurement
• Initial Measurement addresses the criteria
and amounts used to measure a particular
item at date of recognition (tells us how much
is recognized).
• Section 310-10-30-2 exemplifies initial
measurement… “when a note is received solely for
cash and no other right or privilege is exchanged, it is
presumed to have a present value at issuance
measured by the cash proceeds exchanged.”
41
Subsequent Measurement
• Subsequent Measurement relates almost exclusively to assets,
liabilities, and equity. It addresses the criteria and amounts used to
measure a particular asset, liability or equity item subsequent to the
date of recognition (e.g., impairment, FMV changes, depreciation,
amortization, etc.).
• 360-10-35 states: “The Subsequent Measurement Section
provides guidance on an entity’s subsequent measurement
and subsequent recognition of an item. Situations that may
result in subsequent changes to carrying amount include
impairment, fair value adjustments, depreciation and
amortization, and so forth.”
42
Derecognition
• De-recognition relates almost exclusively to assets, liabilities,
and equity. It addresses: (1) the criteria, (2) the basis to be
relieved (i.e., dollar amount), and (3) the timing to be used
when derecognizing a particular asset, liability or equity item
for purposes of determining gain or loss, if any
43
Presentation
• This section will include presentation matters
related to the subtopic. Some examples
include:
– Specific balance sheet classification requirements
for a derivative
– Specific cash flow requirements for stock
compensation
– Specific effect on EPS related to stock
compensation guidance
44
Disclosure
• Disclosure includes specific disclosure
requirements for a subtopic, but excludes
general disclosure requirements.
• Readers will be referred to other sections of
the codification for relevant disclosure
guidance for related subtopics.
45
Implementation guidance and illustrations
• This section will contain implementation guidance and
illustrations of the standards.
• The primary sources for the implementation guidance and
illustrations section include:
– (1) Implementation guidance and illustrations contained in
appendices of various standards,
– (2) FASB Staff Question & Answer documents,
– (3) FASB Staff Positions, and
– (4) EITF Abstracts.
46
Relationships
• Relationships include references to other
subtopics that may contain guidance related
to the subtopic.
• This section is intended to provide a simple
reference to the relevant sections and will not
include a complete description of the
relationship.
47
Transition and Open Effective Date
Information
• This section is intended to contain guidance
and references to paragraphs within the
subtopic that have open transition guidance.
• Modified paragraphs will appear in the
relevant section of the codification with some
form of emphasis (e.g., boxed).
48
Links to Grandfathered Materials
• Grandfathered material will contain
descriptions, references, and transition
periods for grandfathered standards.
49
Why are some sections missing?
50
Why is there no Implementation
Guidance for Equity?
• Codification authors did not write new GAAP.
• Since there was no Implementation Guidance
under the standards-based system, there is
none under the Codification.
51
What about convergence
with IFRS?
• IFRS does not follow the Codification system.
References in IFRS are much like the old
system under GAAP.
• While many standards are virtually identical,
FASB and IASB have yet to agree on how
converged standards will be referenced.
52
GAAP Hierarchy in
IFRS (IAS 8)
• If there is no specific guidance in a Standard or Interpretation, an
enterprise should:
– apply by analogy other Standards that deal with similar or related
issues
– apply the definitions and criteria set out in the IASB Framework
– apply pronouncements of national standard setters and accepted
industry practices, providing that these are consistent with other
Standards, other Interpretations, and the Conceptual Framework
– Entities may use any GAAP that has a Conceptual Framework
consistent with IFRS
53
FASB’s Due Process Procedure
• Topic added to FASB’s agenda
– Issues may arise from EITF, Financial Accounting Standards
Advisory Council (FASB), Research Staff of FASB, SEC,
industry or other groups
• Task force and FASB researchers write a discussion
memorandum that is then released to the public
• Hearings are held
• Task force revises and prepares an exposure draft
• Hearings are held
54
FASB’s Due Process Procedure
• Task force evaluates and revises as necessary
• Full FASB board (7 full-time members serving
5-year terms) votes on draft.
• If 4 of 7 approve, a Standards Statement is
issued
• Process can take years….
55
We will focus on Exposure Drafts
• For each topic we address this term, you will
focus on financial transparency and whether it
is enhanced or diminished by the proposed
accounting guidance.
• For example, next class, I will give a
presentation on the Leasing exposure draft
and we will discuss whether the draft, if fully
implemented, will enhance or diminish
transparency and why
What is financial transparency?
• After banking crisis, much talk of financial
transparency
• Reforms were proposed that would increase
transparency
• Is there a common definition?
Transparent financial reports
• “… are clear, accurate reports that reflect the
economic substance of transactions in a
straightforward manner, even in times of great
uncertainty.” [McEwen, 2009]
• Transparent reports are useful in making
decisions.
Examples?
• Would publishing an aging schedule of
receivables enhance transparency?
• Why?
• Would forcing off balance sheet debt onto the
balance sheet enhance transparency?
• If the disclosure already is in the footnotes,
why would adding it to the balance sheet
enhance transparency?
Presentations
•
•
•
•
•
Summary of the General Topic Area
Treatment under Current GAAP
Treatment if Exposure Draft fully adopted
Summary of Major Differences
The Effect on Financial Transparency if
Exposure Draft fully adopted – focus on why
Presentation requirements
for presenters
• Presenters are required to turn in a PowerPoint
presentation
• Assume that you are explaining the new guidance
to a client
• Dress professionally for your clients
• Be ready to answer questions and to engage your
clients in a discussion
• Provide examples.
• Cite your sources.
• Introduce yourself.
Presentation requirements for clients
• Write a one-page, three paragraph paper on how
the exposure draft, if fully implemented, will
affect transparency.
• Paragraph one should introduce the topic.
• The second paragraph should summarize the
major differences between the old and new
guidance
• The last paragraph should state your ideas about
whether transparency will be enhanced or
diminished and why.
Teamwork
• Is encouraged…
• Except for the one-page write up.
• Discuss as much as you wish with your team,
but write your own paper.
• Use turnitin.com to submit the paper
• The similarity index cannot exceed 20%