QUESTIONS
1.
Differentiate broadly between financial accounting and managerial accounting.
Answer:
1. Financial accounting measures, classifies, and summarizes in report form those activities and that
information which relate to the enterprise as a whole for use by parties both internal and external to a
business enterprise. Managerial accounting also measures, classifies, and summarizes in report
form enterprise activities, but the communication is for the use of internal, managerial parties, and
relates more to subsystems of the entity. Managerial accounting is management decision oriented
and directed more toward product line, division, and profit center reporting
2. Differentiate between “financial statements” and “financial reporting.”
1. Financial accounting measures, classifies, and summarizes in report form those activities and that
information which relate to the enterprise as a whole for use by parties both internal and external to a
business enterprise. Managerial accounting also measures, classifies, and summarizes in report
form enterprise activities, but the communication is for the use of internal, managerial parties, and
relates more to subsystems of the entity. Managerial accounting is management decision oriented
and directed more toward product line, division, and profit center reporting
2. Differentiate between “financial statements” and “financial reporting.”
Answer:
2. Financial statements generally refer to the four basic financial statements: balance sheet, income
statement, statement of cash flows, and statement of changes in owners’ or stockholders’ equity.
Financial reporting is a broader concept; it includes the basic financial statements and any other
means of communicating financial and economic data to interested external parties. Examples of
financial reporting other than financial statements are annual reports, prospectuses, reports filed with
the government, news releases, management forecasts or plans, and descriptions of an enterprise’s
social or environmental impact.
3. How does accounting help the capital allocation process?
2. Financial statements generally refer to the four basic financial statements: balance sheet, income
statement, statement of cash flows, and statement of changes in owners’ or stockholders’ equity.
Financial reporting is a broader concept; it includes the basic financial statements and any other
means of communicating financial and economic data to interested external parties. Examples of
financial reporting other than financial statements are annual reports, prospectuses, reports filed with
the government, news releases, management forecasts or plans, and descriptions of an enterprise’s
social or environmental impact.
3. How does accounting help the capital allocation process?
Answer:
3. If a company’s financial performance is measured accurately, fairly, and on a timely basis, the right
managers and companies are able to attract investment capital. To provide unreliable and irrelevant
information leads to poor capital allocation which adversely affects the securities market.
4. What is the objective of financial reporting?
3. If a company’s financial performance is measured accurately, fairly, and on a timely basis, the right
managers and companies are able to attract investment capital. To provide unreliable and irrelevant
information leads to poor capital allocation which adversely affects the securities market.
4. What is the objective of financial reporting?
Answer:
4. The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to present and potential equity investors, lenders, and other creditors
in decisions about providing resources to the entity through equity investments and loans or other
forms of credit. Information that is decision-useful to capital providers (investors) may also be useful
to other users of financial reporting who are not investors.
5. Briefly explain the meaning of decision-usefulness in the context of financial reporting.
4. The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to present and potential equity investors, lenders, and other creditors
in decisions about providing resources to the entity through equity investments and loans or other
forms of credit. Information that is decision-useful to capital providers (investors) may also be useful
to other users of financial reporting who are not investors.
5. Briefly explain the meaning of decision-usefulness in the context of financial reporting.
Answer:
5. Investors are interested in financial reporting because it provides information that is useful for
making decisions (referred to as the decision-usefulness approach). When making these decisions,
investors are interested in assessing the company’s (1) ability to generate net cash inflows and (2)
management’s ability to protect and enhance the capital providers’ investments. Financial
reporting should therefore help investors assess the amounts, timing, and uncertainty of
prospective cash inflows from dividends or interest, and the proceeds from the sale, redemption,
or maturity of securities or loans. In order for investors to make these assessments, the economic
resources of an enterprise, the claims to those resources, and the changes in them must be
understood.
6. Of what value is a common set of standards in financial accounting and reporting?
5. Investors are interested in financial reporting because it provides information that is useful for
making decisions (referred to as the decision-usefulness approach). When making these decisions,
investors are interested in assessing the company’s (1) ability to generate net cash inflows and (2)
management’s ability to protect and enhance the capital providers’ investments. Financial
reporting should therefore help investors assess the amounts, timing, and uncertainty of
prospective cash inflows from dividends or interest, and the proceeds from the sale, redemption,
or maturity of securities or loans. In order for investors to make these assessments, the economic
resources of an enterprise, the claims to those resources, and the changes in them must be
understood.
6. Of what value is a common set of standards in financial accounting and reporting?
Answer:
6. A common set of standards applied by all businesses and entities provides financial statements
which are reasonably comparable. Without a common set of standards, each enterprise could, and
would, develop its own theory structure and set of practices, resulting in noncomparability among
enterprises.
7. What is the likely limitation of “general-purpose financial statements”?
6. A common set of standards applied by all businesses and entities provides financial statements
which are reasonably comparable. Without a common set of standards, each enterprise could, and
would, develop its own theory structure and set of practices, resulting in noncomparability among
enterprises.
7. What is the likely limitation of “general-purpose financial statements”?
Answer:
7. General-purpose financial statements are not likely to satisfy the specific needs of all interested
parties. Since the needs of interested parties such as creditors, managers, owners, governmental
agencies, and financial analysts vary considerably, it is unlikely that one set of financial statements
is equally appropriate for these varied uses.
8. In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles and standards?
7. General-purpose financial statements are not likely to satisfy the specific needs of all interested
parties. Since the needs of interested parties such as creditors, managers, owners, governmental
agencies, and financial analysts vary considerably, it is unlikely that one set of financial statements
is equally appropriate for these varied uses.
8. In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles and standards?
Answer:
8. The SEC has the power to prescribe, in whatever detail it desires, the accounting practices and
principles to be employed by the companies that fall within its jurisdiction. Because the SEC receives
audited financial statements from nearly all companies that issue securities to the public or are listed
on the stock exchanges, it is greatly interested in the content, accuracy, and credibility of the
statements. For many years the SEC relied on the AICPA to regulate the profession and develop
and enforce accounting principles. Lately, the SEC has assumed a more active role in the development
of accounting standards, especially in the area of disclosure requirements. In December 1973,
in ASR No. 150, the SEC said the FASB’s statements would be presumed to carry substantial
authoritative support and anything contrary to them to lack such support. It thereby supports the
development of accounting principles in the private sector.
9. What was the Committee on Accounting Procedure, and what were its accomplishments and failings?
8. The SEC has the power to prescribe, in whatever detail it desires, the accounting practices and
principles to be employed by the companies that fall within its jurisdiction. Because the SEC receives
audited financial statements from nearly all companies that issue securities to the public or are listed
on the stock exchanges, it is greatly interested in the content, accuracy, and credibility of the
statements. For many years the SEC relied on the AICPA to regulate the profession and develop
and enforce accounting principles. Lately, the SEC has assumed a more active role in the development
of accounting standards, especially in the area of disclosure requirements. In December 1973,
in ASR No. 150, the SEC said the FASB’s statements would be presumed to carry substantial
authoritative support and anything contrary to them to lack such support. It thereby supports the
development of accounting principles in the private sector.
9. What was the Committee on Accounting Procedure, and what were its accomplishments and failings?
Answer:
9. The Committee on Accounting Procedure was a special committee of the American Institute of CPAs
that, between the years of 1939 and 1959, issued 51 Accounting Research Bulletins dealing with
a wide variety of timely accounting problems. These bulletins provided solutions to immediate
problems and narrowed the range of alternative practices. But, the Committee’s problem-by-problem
approach failed to provide a well-defined and well-structured body of accounting theory that was so
badly needed. The Committee on Accounting Procedure was replaced in 1959 by the Accounting
Principles Board.
10. For what purposes did the AICPA create the Accounting Principles Board?
9. The Committee on Accounting Procedure was a special committee of the American Institute of CPAs
that, between the years of 1939 and 1959, issued 51 Accounting Research Bulletins dealing with
a wide variety of timely accounting problems. These bulletins provided solutions to immediate
problems and narrowed the range of alternative practices. But, the Committee’s problem-by-problem
approach failed to provide a well-defined and well-structured body of accounting theory that was so
badly needed. The Committee on Accounting Procedure was replaced in 1959 by the Accounting
Principles Board.
10. For what purposes did the AICPA create the Accounting Principles Board?
Answer:
10. The creation of the Accounting Principles Board was intended to advance the written expression
of accounting principles, to determine appropriate practices, and to narrow the differences and
inconsistencies in practice. To achieve its basic objectives, its mission was to develop an overall
conceptual framework to assist in the resolution of problems as they became evident and to do
substantive research on individual issues before pronouncements were issued.
11. Distinguish between Opinions of the Accounting Principles Board and Accounting Standards Updates.
10. The creation of the Accounting Principles Board was intended to advance the written expression
of accounting principles, to determine appropriate practices, and to narrow the differences and
inconsistencies in practice. To achieve its basic objectives, its mission was to develop an overall
conceptual framework to assist in the resolution of problems as they became evident and to do
substantive research on individual issues before pronouncements were issued.
11. Distinguish between Opinions of the Accounting Principles Board and Accounting Standards Updates.
Answer:
11. Accounting Research Bulletins were pronouncements on accounting practice issued by the
Committee on Accounting Procedure between 1939 and 1959; since 1964 they have been
recognized as accepted accounting practice unless superseded in part or in whole by an opinion of
the APB or an FASB standard. APB Opinions were issued by the Accounting Principles Board
during the years 1959 through 1973 and, unless superseded by FASB Statements, are recognized
as accepted practice and constitute the requirements to be followed by all business enterprises.
Accounting Standards Updates are pronouncements of the Financial Accounting Standards Board
that are incorporated into the FASB codification and therefore represent the accounting profession’s
authoritative pronouncements on financial accounting and reporting practices.
12. If you had to explain or define “generally accepted accounting principles or standards,” what essential characteristics would you include in your explanation?
11. Accounting Research Bulletins were pronouncements on accounting practice issued by the
Committee on Accounting Procedure between 1939 and 1959; since 1964 they have been
recognized as accepted accounting practice unless superseded in part or in whole by an opinion of
the APB or an FASB standard. APB Opinions were issued by the Accounting Principles Board
during the years 1959 through 1973 and, unless superseded by FASB Statements, are recognized
as accepted practice and constitute the requirements to be followed by all business enterprises.
Accounting Standards Updates are pronouncements of the Financial Accounting Standards Board
that are incorporated into the FASB codification and therefore represent the accounting profession’s
authoritative pronouncements on financial accounting and reporting practices.
12. If you had to explain or define “generally accepted accounting principles or standards,” what essential characteristics would you include in your explanation?
Answer:
12. The explanation should note that generally accepted accounting principles or standards have
“substantial authoritative support.” They consist of accounting practices, procedures, theories,
concepts, and methods which are recognized by a large majority of practicing accountants as well
as other members of the business and financial community. Bulletins issued by the Committee on
Accounting Procedure, opinions rendered by the Accounting Principles Board, and statements
issued by the Financial Accounting Standards Board constitute “substantial authoritative support.”
13. In what ways was it felt that the pronouncements issued by the Financial Accounting Standards Board would carry greater weight than the opinions issued by the Accounting Principles Board?
12. The explanation should note that generally accepted accounting principles or standards have
“substantial authoritative support.” They consist of accounting practices, procedures, theories,
concepts, and methods which are recognized by a large majority of practicing accountants as well
as other members of the business and financial community. Bulletins issued by the Committee on
Accounting Procedure, opinions rendered by the Accounting Principles Board, and statements
issued by the Financial Accounting Standards Board constitute “substantial authoritative support.”
13. In what ways was it felt that the pronouncements issued by the Financial Accounting Standards Board would carry greater weight than the opinions issued by the Accounting Principles Board?
14. How are FASB preliminary views and FASB exposure drafts related to FASB “statements”?
15. Distinguish between FASB Accounting Standards Updates and FASB Statements of Financial Accounting Concepts.
16. What is Rule 203 of the Code of Professional Conduct?
17. The chair of the FASB at one time noted that “the flow of standards can only be slowed if (1) producers focus less on quarterly earnings per share and tax benefits and more on quality products, and (2) accountants and lawyers rely less on rules and law and more on professional judgment and conduct.” Explain his comment.
18. Explain the role of the Emerging Issues Task Force in establishing generally accepted accounting principles.
19. What is the difference between the Codification and the Codification Research System?
20. What are the primary advantages of having a Codification of generally accepted accounting principles?
21. What are the sources of pressure that change and influence the development of GAAP?
22. Some individuals have indicated that the FASB must be cognizant of the economic consequences of its pronouncements. What is meant by “economic consequences”? What dangers exist if politics play too much of a role in the development of GAAP?
23. If you were given complete authority in the matter, how would you propose that GAAP should be developed and enforced?
24. One writer recently noted that 99.4 percent of all companies prepare statements that are in accordance with GAAP. Why then is there such concern about fraudulent financial reporting?
25. What is the “expectations gap”? What is the profession doing to try to close this gap?
26. The Sarbanes-Oxley Act was enacted to combat fraud and curb poor reporting practices. What are some key provisions of this legislation?
27. What are some of the major challenges facing the accounting profession?
28. How are financial accountants challenged in their work to make ethical decisions? Is technical mastery of GAAP not sufficient to the practice of financial accounting?
CONCEPTS FOR ANALYSIS
CA1-1
(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.
CA1-2
(GAAP 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. 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.
CA1-3
(Financial Reporting and Accounting Standards) 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.
CA1-4
(Financial Accounting) 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?
CA1-5
(Objective of Financial Reporting) Karen Sepan, a recent graduate of the local
state university, is presently employed by a large manufacturing company. She
has been asked by Jose Martinez, controller, to prepare 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.
CA1-6 (Accounting Numbers and the Environment) Hardly a day goes by without an article appearing on the continuing fallout from the financial crisis of 2008. An overheated real estate market, fueled by home purchase incentives, poor lending practices, and securitization through high-risk, mortgage-backed securities, led to a near collapse of global capital markets. As a consequence, many have argued that if the financial institutions had been required to report their loans (and loan-backed investments) at fair value instead of cost, large losses would have been reported earlier. This would have signaled regulators to the problems in the mortgage markets and therefore minimized the losses to U.S. taxpayers.
Instructions
Explain
how reported accounting numbers might affect an individual’s perceptions and
actions. Cite two examples.
CA1-7 WRITING (Need for GAAP) Some argue that having various organizations establish accounting principles is wasteful and inefficient. Rather than mandating accounting rules, each company could voluntarily disclose the 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.
CA1-8
(AICPA’s Role in Rule-Making) One of the major groups that has been involved in
the standard-setting 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?
CA1-9
(FASB Role in 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.
CA1-10
WRITING (Politicization of GAAP) 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?
(CMA adapted)
CA1-11
(Models for Setting GAAP) 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? Provide justification for 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.
CA1-12
GROUPWORK (GAAP Terminology) 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) FASB
(b) CAP
(f) FASAC (j) SEC
(c) EITF
(g) GAAP (k) IASB
(d) APB
(h) CPA
CA1-13
ETHICS (Rule-Making Issues) 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? (CMA adapted)
CA1-14
(Securities and Exchange Commission) 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.
(CMA
adapted)
CA1-15
ETHICS (Financial Reporting Pressures) 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.
Q. Did
anyone ever ask you to do that?
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?
(c) What
would you do if you were Troy Normand?
(d) Who
are the major stakeholders in this case?
CA1-16
(Economic Consequences) 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.
CA1-17
GROUPWORK (GAAP and Economic Consequences) 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 the 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?
USING
YOUR JUDGMENT
Financial
Reporting Problem
Beverly
Crusher, a new staff accountant, is confused because of the complexities
involving accounting standard-setting. Specifically, she is confused by the
number of bodies issuing financial reporting standards of one kind or another
and the level of authoritative support that can be attached to these reporting
standards. Beverly decides that she must review the environment in which
accounting standards are set, if she is to increase her understanding of the
accounting profession.
Beverly
recalls that during her accounting education there was a chapter or two
regarding the environment of financial accounting and the development of GAAP.
However, she remembers that her instructor placed little emphasis on these
chapters.
Instructions
(a) Help
Beverly by identifying key organizations involved in accounting rule-making.
(b)
Beverly asks for guidance regarding authoritative support. Please assist her by
explaining what is meant by authoritative support.
(c) Give
Beverly a historical overview of how rule-making has evolved so that she will
not feel that she is the only one to be confused.
(d) What
authority for compliance with GAAP has existed throughout the history of
rule-making?
BRIDGE
TO THE PROFESSION
Codification
Exercises
CE1-1
Describe the main elements of the link labeled “Help, FAQ, Learning Guide, and
About the Codification.”
CE1-2
Describe the procedures for providing feedback.
CE1-3
Briefly describe the purpose and content of the “What’s New” link.
Codification
Research Case
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.
IFRS
CONCEPTS AND APPLICATION
IFRS1-1
What organizations are the two key international players in the development of
international accounting standards?
Explain
their role.
IFRS1-2
What might explain the fact that different accounting standard-setters have
developed accounting standards that are sometimes quite different in nature?
IFRS1-3
What is the benefit of a single set of high-quality accounting standards?
IFRS1-4
Briefly describe the FASB/IASB convergence process and the principles that
guide their convergence efforts.
Financial
Reporting Case
IFRS1-5
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?
Professional
Research
IFRS1-6
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 The Conceptual Framework for Financial
Reporting.
Instructions
(a) What
is the objective of general-purpose 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.
IFRS1-7
The financial statements of M&S are presented in Appendix E. The company’s
complete annual report, including the notes to the financial statements, is
available online.
Instructions
Refer to
M&S’s financial statements and the accompanying notes to answer the
following questions.
(a) What
is the company’s main line of business?
(b) In
what countries does the company operate?
(c) What
is the address of the company’s corporate headquarters?
(d) What
is the company’s reporting currency?
