Intermediate accounting 17e by kieso ch01

Intermediate Accounting Seventeenth Edition Kieso ● Weygandt ● Warfield Chapter Financial Accounting and Accounting Standards This slide deck contains animations Please disable animations if they cause issues with your device Learning Objectives After studying this chapter, you should be able to: Describe the financial reporting environment 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 major challenges in the financial reporting environment Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter Financial Accounting and Accounting Standards Financial Reporting Environment • Accounting and capital allocation • Objective of financial reporting • Need to develop standards Parties Involved in Standard-Setting • Securities and Exchange Commission • American Institute of CPAs • Financial Accounting Standards Board Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter Financial Accounting and Accounting Standards Generally Accepted Accounting Principles • FASB Codification Major Challenges in Financial Reporting • Political environment • Expectations gap • Financial reporting issues International accounting standards Ethics Copyright â2019 John Wiley & Sons, Inc Learning Objective Describe the Financial Reporting Environment LO Copyright ©2019 John Wiley & Sons, Inc Financial Reporting Environment Essential characteristics of accounting are: (1) the identification, measurement, and communication of financial information about (2) economic entities to (3) interested parties LO Copyright ©2019 John Wiley & Sons, Inc Financial Reporting Environment Economic Entity Financial Statements Additional Information Financial Financial Information Information Balance Sheet President’s President’s letter letter Income Income Statement Statement Prospectuses Prospectuses Statement Statement of of Cash Cash Flows Flows Reports Reports filed filed with with governmental agencies Statement Statement of of Owners’ Owners’ or or Stockholders’ Stockholders’ Equity Equity News News releases releases Note Note Disclosures Environmental Environmental impact impact statements statements GAAP Etc Etc Accounting? Accounting? Identifies Identifies and and Measures Measures and and Communicates Communicates LO Copyright ©2019 John Wiley & Sons, Inc Forecasts Forecasts Financial Reporting Environment Review Question 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 LO Copyright ©2019 John Wiley & Sons, Inc Financial Reporting Environment Review Question Answer 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 LO Copyright ©2019 John Wiley & Sons, Inc Financial Reporting Environment Accounting and Capital Allocation Resources are limited Efficient use of resources often determines whether a business thrives LO Copyright ©2019 John Wiley & Sons, Inc 10 Learning Objective Compare GAAP and IFRS and their Standard-Setting Process Copyright ©2019 John Wiley & Sons, Inc 42 IFRS Insights (1 of 13) Relevant Facts Similarities • Generally accepted accounting principles (GAAP) for U.S companies are developed by the Financial Accounting Standards Board (FASB) The FASB is a private organization The Securities and Exchange Commission (SEC) exercises oversight over the actions of the FASB The IASB is also a private organization Oversight over the actions of the IASB is regulated by IOSCO • Both the IASB and the FASB have essentially the same governance structure, that is, a Foundation that provides oversight, a Board, an Advisory Council, and an Interpretations Committee In addition, a general body that involves the public governance structure ©2019 John Wiley & Sons, Inc LO interest is part of the Copyright 43 IFRS Insights (2 of 13) Relevant Facts Similarities • The FASB relies on the SEC for regulation and enforcement of its standards The IASB relies primarily on IOSCO for regulation and enforcement of its standards • Both the IASB and the FASB are working together to find common grounds for convergence A good example is the recent issuance of a new standard on revenue recognition that both organizations support LO Copyright ©2019 John Wiley & Sons, Inc 44 IFRS Insights (3 of 13) Relevant Facts Differences • GAAP is more detailed or rules-based IFRS tends to simpler and more flexible in its accounting and disclosure requirements The difference in approach has resulted in a debate about the merits of principles-based versus rules-based standards • Differences between GAAP and IFRS should not be surprising because standard-setters have developed standards in response to different user needs In some countries, the primary users of financial statements are private investors In others, the primary users are tax authorities or central government planners In the United States, investors and creditors have driven accountingCopyright ©2019 John Wiley & Sons, Inc 45 LO standard formulation IFRS Insights (4 of 13) About the Numbers World markets are becoming increasingly intertwined International consumers drive Japanese cars, wear Italian shoes and Scottish woolens, drink Brazilian coffee and Indian tea, eat Swiss chocolate bars, sit on Danish furniture, watch U.S movies, and use Arabian oil The tremendous variety and volume of both exported and imported goods indicates the extensive involvement in international trade—for many companies, the world is their market To provide some indication of the extent of globalization of economic activity, Illustration IFRS1-1 provides a listing of the top 20 global companies in terms of sales LO Copyright ©2019 John Wiley & Sons, Inc 46 IFRS Insights (5 of 13) Rank Company Wal-Mart Stores State Grid Sinopec Group China National Petroleum U.S China China China 10 Royal Dutch Shell Toyota Motor Volkswagen BP ExxonMobil Berkshire Hathaway Netherlands Japan Germany U.K U.S U.S LO Country Copyright ©2019 John Wiley & Sons, Inc Revenues ($ millions) $509,343 348,903 326,953 326,008 311,870 265,172 260,028 244,582 244,363 242,137 47 IFRS Insights (6 of 13) Rank Company Country 11 12 13 14 Apple Samsung Electronics McKesson Glencore International U.S South Korea U.S Switzerland 15 16 17 18 19 20 United Health Group Daimler CVS Health Amazon.com EXOR Group AT&T U.S Germany U.S U.S Italy U.S LO Copyright ©2019 John Wiley & Sons, Inc Revenues ($ millions) $229,234 211,940 208,357 205,476 201,159 185,235 184,765 177,866 161,677 160,546 48 IFRS Insights (7 of 13) International Standard-Setting Organizations: International Accounting Standards Board (IASB) • Issues International Financial Reporting Standards (IFRS) • Standards used on most foreign exchange • Standards used by foreign companies listing on U.S securities exchanges • IFRS used in over 120 countries International Organization of Securities Commissions (IOSCO) • Does not set accounting standards LO • Dedicated to ensuring that global markets can operate in an efficient and effective basis Copyright ©2019 John Wiley & Sons, Inc 49 IFRS Insights (8 of 13) International Accounting Standards Board (IASB) Composed of four organizations— • International Accounting Standards Committee Foundation (IASCF) • International Accounting Standards Board (IASB) • Standards Advisory Council • International Financial Reporting Interpretations Committee (IFRIC) LO Copyright ©2019 John Wiley & Sons, Inc 50 IFRS Insights (9 of 13) LO Copyright ©2019 John Wiley & Sons, Inc 51 IFRS Insights (10 of 13) Types of Pronouncements • International Financial Reporting Standards • Framework For Financial Reporting International Financial Reporting Interpretations LO Copyright â2019 John Wiley & Sons, Inc 52 IFRS Insights (11 of 13) Hierarchy of IFRS Companies first look to: International Financial Reporting Standards; International Accounting Standards; and Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC) LO Copyright ©2019 John Wiley & Sons, Inc 53 IFRS Insights (12 of 13) International Accounting Convergence Rather than adopting IFRS at a point in time, the endorsement approach specifies that the FASB and IASB continue to collaborate to align GAAP and IFRS As a result, standards (which are also IFRS) could be incorporated into GAAP Since the publication of the Staff Paper in 2012, the SEC staff has received input from various constituents on the desirability and feasibility of a full movement, optional or otherwise, to IFRS for domestic issuers To date, that feedback indicates that U.S constituents generally are not supportive of full adoption of IFRS for a variety of reasons, including legal issues and general costbenefit concerns LO Copyright ©2019 John Wiley & Sons, Inc 54 IFRS Insights (13 of 13) On the Horizon Both the IASB and the FASB are hard at work developing standards that will lead to the elimination of major differences in the way certain transactions are accounted for and reported In fact, beginning in 2010, the IASB (and the FASB on its joint projects with the IASB) started its policy of phasing in adoption of new major standards over several years The major reason for this policy is to provide companies time to translate and implement international standards into practice Much has happened in a very short period of time in the international accounting environment While adoption of IFRS in the United States is an unlikely avenue to achieve a single set of high-quality accounting standards, there continues to be strong support for the Boards to continue their Copyright ©2019 John Wiley & Sons, Inc 55 LOwork to narrow the differences between GAAP and IFRS Copyright Copyright © 2019 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States 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 Copyright ©2019 John Wiley & Sons, Inc 56 ... of CPAs • Financial Accounting Standards Board Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter Financial Accounting and Accounting Standards Generally Accepted Accounting Principles... reporting issues by performing research, analysis, and writing functions 24 Financial Accounting Standards Board (3 of 3) Organizational Structure for Setting Accounting Standards Financial Accounting. .. Financial Accounting Standards Board Due Process LO Copyright ©2019 John Wiley & Sons, Inc 28 Financial Accounting Standards Board Types of Pronouncements Accounting Standards Updates LO Financial Accounting