Chapter 1-1 CHAPTER FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 1-2 Learning Learning Objectives Objectives Identify the major financial statements and other means of financial reporting Explain how accounting assists in the efficient use of scarce resources Describe some of the challenges facing accounting List the objectives of financial reporting Explain the need for accounting standards Identify the major policy-setting bodies and their role in the standard-setting process Explain the meaning of generally accepted accounting principles (GAAP) and the role of the Codification for GAAP Describe the impact of user groups on the rule-making process Understand issues related to ethics and financial accounting Chapter 1-3 Financial Financial Accounting Accounting and and Accounting Accounting Standards Standards Financial Statements and Financial Reporting Accounting and capital allocation Challenges Objectives Need to develop standards Chapter 1-4 Parties Involved in Standard Setting Securities and Exchange Commission American Institute of CPAs Financial Accounting Standards Board Changing role of the AICPA Generally Accepted Accounting Principles FASB Codification Issues in Financial Reporting Political environment Expectations gap International accounting standards Ethics Financial Financial Statements Statements and and Financial Financial Reporting Reporting Essential characteristics of accounting are: (1) the identification, measurement, and communication of financial information about (2) economic entities to (3) interested parties Chapter 1-5 LO Identify the major financial statements and other means of financial reporting Financial Financial Statements Statements and and Financial Financial Reporting Reporting Economic Entity Financial Statements Additional Information Financial Information Balance Sheet President’s letter Income Statement Prospectuses, Statement of Cash Flows SEC Reporting Accounting? Identifies and Measures and Communicates Chapter 1-6 Statement of Owners’ or Stockholders’ Equity News releases Forecasts Environmental Reports Note Disclosures Etc GAAP Not GAAP LO Identify the major financial statements and other means of financial reporting Financial Financial Statements Statements and and Financial Financial Reporting Reporting Review What is the purpose of information presented in notes to the financial statements? a To provide disclosure required by generally accepted accounting principles b To correct improper presentation in the financial statements c To provide recognition of amounts not included in the totals of the financial statements d To present management’s responses to auditor comments Chapter 1-7 LO Identify the major financial statements and other means of financial reporting Accounting Accounting and and Capital Capital Allocation Allocation Resources are limited Efficient use of resources often determines whether a business thrives Illustration 1-1 Capital Allocation Process Financial Reporting Information to help users with capital allocation decisions Chapter 1-8 Users Investors, creditors, and other users Capital Allocation The process of determining how and at what cost money is allocated among competing interests LO Explain how accounting assists in the efficient use of scare resources Accounting Accounting and and Capital Capital Allocation Allocation Review An effective process of capital allocation is critical to a healthy economy, which a promotes productivity b encourages innovation c provides an efficient and liquid market for buying and selling securities d All of the above Chapter 1-9 LO Explain how accounting assists in the efficient use of scare resources Challenges Challenges Facing Facing Financial Financial Accounting Accounting Nonfinancial Measurements Forward-looking Information Soft Assets Timeliness Chapter 1-10 LO Describe some of the challenges facing accounting Illustration 21A21A-3 Chapter 21-73 LO 10 Understand and apply lease accounting concepts to various lease arrangements Chapter 21-74 LO 10 Understand and apply lease accounting concepts to various lease arrangements Illustration 21A21A-4 Chapter 21-75 LO 10 Understand and apply lease accounting concepts to various lease arrangements Chapter 21-76 LO 10 Understand and apply lease accounting concepts to various lease arrangements Illustration 21A21A-5 Chapter 21-77 LO 10 Understand and apply lease accounting concepts to various lease arrangements The term sale-leaseback describes a transaction in which the owner of the property (seller-lessee) sells the property to another and simultaneously leases it back from the new owner Advantages: May allow seller to refinance at lower rates May provide another source of working capital, particularly when liquidity is tight By selling the property, the seller-lessee may deduct the entire lease payment, which is not subject to alternative minimum tax considerations Chapter 21-78 LO 11 Describe the lessee’s accounting for sale-leaseback transactions Determining Asset Use To the extent the seller-lessee continues to use the asset after the sale, the sale-leaseback is really a form of financing ¾ Lessor should not recognize a gain or loss on the transaction If the seller-lessee gives up the right to the use of the asset, the transaction is in substance a sale ¾ Chapter 21-79 Gain or loss recognition is appropriate LO 11 Describe the lessee’s accounting for sale-leaseback transactions Lessee If the lease meets one of the four criteria for treatment as a capital lease, the seller-lessee should ¾ Account for the transaction as a sale and the lease as a capital lease ¾ Defer any profit or loss it experiences from the sale of the assets that are leased back under a capital lease ¾ Amortize profit over the lease term Chapter 21-80 LO 11 Describe the lessee’s accounting for sale-leaseback transactions Lessee If none of the capital lease criteria are satisfied, the seller-lessee accounts for the transaction as a sale and the lease as an operating lease ¾ Lessee defers such profit or loss and amortizes it in proportion to the rental payments over the period when it expects to use the assets Exceptions: ¾ Losses Recognized and Minor Leaseback Chapter 21-81 LO 11 Describe the lessee’s accounting for sale-leaseback transactions Lessor If the lease meets one of the criteria in Group I and both of the criteria in Group II, the purchaser-lessor records the transaction as a purchase and a directfinancing lease If the lease does not meet the criteria, the purchaserlessor records the transaction as a purchase and an operating lease Chapter 21-82 LO 11 Describe the lessee’s accounting for sale-leaseback transactions Sale-Leaseback Example American Airlines on January 1, 2011, sells a used Boeing 757 having a carrying amount on its books of $75,500,000 to CitiCapital for $80,000,000 American immediately leases the aircraft back under the following conditions: The term of the lease is 15 years, noncancelable, and requires equal rental payments of $10,487,443 at the beginning of each year The aircraft has a fair value of $80,000,000 on January 1, 2011, and an estimated economic life of 15 years American pays all executory costs American depreciates similar aircraft that it owns on a straight-line basis over 15 years Chapter 21-83 The annual payments assure the lessor a 12 percent return American’s incremental borrowing rate is 12 percent LO 11 Describe the lessee’s accounting for sale-leaseback transactions Sale-Leaseback Example This lease is a capital lease to American because ¾ lease term exceeds 75 percent of the estimated life of the aircraft and ¾ present value of the lease payments exceeds 90 percent of the fair value of the aircraft to CitiCapital Assuming that collectibility of the lease payments is reasonably predictable and that no important uncertainties exist in relation to unreimbursable costs yet to be incurred by CitiCapital, it should classify this lease as a direct-financing lease Chapter 21-84 LO 11 Describe the lessee’s accounting for sale-leaseback transactions Sale-Leaseback Example Chapter 21-85 LO 11 Describe the lessee’s accounting for sale-leaseback transactions Sale-Leaseback Example Chapter 21-86 LO 11 Describe the lessee’s accounting for sale-leaseback transactions Copyright Copyright Copyright © 2009 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 21-87 ...CHAPTER FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 1-2 Learning Learning Objectives... accounting Chapter 1-3 Financial Financial Accounting Accounting and and Accounting Accounting Standards Standards Financial Statements and Financial Reporting Accounting and capital allocation Challenges... Committee Committee on on Accounting Accounting Procedures Procedures Chapter 1-16 Accounting Accounting Principles Board Board Principles z 1939 to 1959 z 1959 to 1973 z Issued 51 Accounting Research