AYB311 Lecture Notes - Lecture 3: Accounting Principles Board, American Accounting Association, Conceptual Framework

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20 Jan 2017

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Lecture 3 the conceptual framework and standard setting. Is a group of ideas or principles used to plan or decide something. A set of broad principles that provide the basis for guiding actions or decisions: way in which financial reports are interpreted to make decisions. Normative: prescribes the basic principles that are to be followed in preparing financial statements. Framework for the preparation and presentation of financial statements. Principles to guide accounting from 1920s and 1930s: 1936 american accounting association. In 1959, american institute of certified public accountants: created accounting principles board. In 1962, published: a tentative set of broad accounting principles for business enterprises. Formal conceptual frameworks begin 1970s following company failures in 1960s. United states: financial accounting standards board (fasb, 1978 and 1989 published six concept statements. Uk, canada and australia: developed own conceptual frameworks. Currently, iasb and fasb undertaking project for common conceptual framework: fasb to adopt principles-based rather than rules-based, has resulted in some changes.

Related Questions

Chapter 2 Conceptual Framework for Financial Reporting LO 2.1Describe the usefulness of a conceptual framework.

A _____________________ in accounting is important becauserule-making should be built on and relate to an established body ofconcepts.

The benefits of a soundly developed conceptual framework are asfollows: a) ______________________________________________________b) ______________________________________________________

Which of the following is not true concerning a conceptualframework in accounting? A. It should be a basis forstandard-setting. B. It should allow practical problems to besolved more quickly by reference to it. C. It should be based onfundamental truths that are derived from the laws of nature. D. Allof these answer choices are true.

LO 2.2 Understand the objective of financial reporting. Toprovide financial information about the reporting entity that is_______________ to present and potential equity_________________________________in making decisions aboutproviding resources to the entity.

In other words the objective is_________________________________________________________________________________________________________________________________________.

LO 2.3 Identify the qualitative characteristics of accountinginformation. The qualitative characteristics of accountinginformation distinguish better and more useful information frominferior and less useful information.

a.Fundamental qualities of useful accounting information.

Relevance._______________________________________________________________________________________________________________________________________________________________

(a)Predictive value.:_____________________________________________________________________________________.

(b)Confirmatory value:_________________________________________________________________________________.

(c)Materiality.:_________________________________________________________________________________.

FaithfulRepresentation.___________________________________________________________________________________________________________________________________________________

(a)Completeness_________________________________________________________

(b)Neutrality_______________________________________________________

(c)Free from error___________________________________________________

b.Enhancing Qualities Enhancing qualities complement thefundamental qualities and include:

Comparability__________________________________________________________________.

Consistency_____________________________________________________________________________________________________________________ Verifiability__________________________________________________________________.

Timeliness__________________________________________________________________.Understandabili_____________________________________________________________________________________________________________________

Select the qualitative characteristics for the followingstatements.

(a) Quality of information that assures users that informationrepresents the economic phenomena that it purports torepresent.

(b) Information about an economic phenomenon that corrects pastor present expectations based on previous evaluations.

(d) Includes all the information that is necessary for afaithful representation of the economic phenomena that it purportsto represent.

(e) Quality of information that allows users to comprehend itsmeaning.

SFAC No. 8 identifies the qualitative characteristics that makeaccounting information useful. Presented below are a number ofquestions related to these qualitative characteristics andunderlying constraint.

(a) What is the quality of information that enables users toconfirm or correct prior expectations?

(b) Identify the pervasive constraint developed in theconceptual framework.

(c) The chairman of the SEC at one time noted, âIf it becomesaccepted or expected that accounting principles are determined ormodified in order to secure purposes other than economicmeasurement, we assume a grave risk that confidence in thecredibility of our financial information system will beundermined.â Which qualitative characteristic of accountinginformation should ensure that such a situation will not occur? (Donot use faithful representation.)

(d) Muruyama Corp. switches from FIFO to averagecost to FIFOover a 2-year period. Which qualitative characteristic ofaccounting information is not followed?

(e) Assume that the profession permits the savings and loanindustry to defer losses on investments it sells because immediaterecognition of the loss may have adverse economic consequences onthe industry. Which qualitative characteristic of accountinginformation is not followed? (Do not use relevance or faithfulrepresentation.)

(f) What are the two fundamental qualities that make accountinginformation useful for decisionmaking?

(g) Watteau Inc. does not issue its first-quarter report untilafter the second quarterâs results are reported. Which qualitativecharacteristic of accounting is not followed? (Do not userelevance.)

(h) Predictive value is an ingredient of which of the twofundamental qualities that make accounting information useful fordecision-making purposes?

(i) Duggan, Inc. is the only company in its industry todepreciate its plant assets on a straight-line basis. Whichqualitative characteristic of accounting information may not befollowed?

(j) Roddick Company has attempted to determine the replacementcost of its inventory. Three different appraisers arrive atsubstantially different amounts for this value. The president,nevertheless, decides to report the middle value for externalreporting purposes. Which qualitative characteristic of informationis lacking in these data? (Do not use relevance or faithfulrepresentation.)

If the LIFO inventory method was used last period, it should beused for the current and following periods because of A.consistency. B. verifiability. C. materiality. D. timeliness.

According to the FASB's conceptual framework, what does theconcept of faithful representation include? A. Predictive value B.Materiality C. Verifiability D. Neutrality

Which of the following is not a basic assumption underlying thefinancial accounting structure? A. Going concern assumption B.Economic entity assumption C. Historical cost assumption D.Periodicity assumption

Under current GAAP, inflation is ignored in accounting due tothe A. periodicity assumption. B. economic entity assumption. C.going concern assumption. D. monetary unit assumption.

Valuing assets at liquidation values rather than cost isinconsistent with the A. historical cost principle. B. materialityconstraint. C. periodicity assumption. D. expense recognitionprinciple.

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Chapter 1 Financial Accounting and Accounting Standards

Other means of financial reporting that are not financialstatements include the presidentâs letter or supplementaryschedules in the corporate annual report, prospectuses, reportsfiled with government agencies, news releases, managementforecasts, and social or environmental impact statements.

a) The objectives of Financial Reporting The objective:

The objective is to prepare financial information that is usefulto present and potential equity investors, lenders and otherstakeholders in taking decision

b) General-purpose financialstatements_______________________________________________________________________________________________________________________________________________________________.

c) Entity perspective____________________________________________________________________

d)Provide decision-useful_________________________________________________________________________________________________________________________________________________.

e) The accounting profession has developed a set of standardsand procedures called _________________________________________________________

LO 1.2 Identify the major policy-setting bodies and their rolein the standard-setting process.

Three organizations: Securities and Exchange Commission (SEC):______________________________

American Institute of Certified Public Accountants (AICPA):_______________________________________________________________

Financial Accounting Standards Board (FASB):____________________________

The federal government established the SEC to help develop andstandardize financial information presented to stockholders. Mostcompanies that issue securities to the public or are listed on astock exchange are required to file audited financial statementswith the SEC._____________________________________________________________________________________________________________________________________.

Under the direction of the SEC the__________________________________ was created by the AICPA in_______. It was the first private sector organization that had thetask of setting accounting standards in the United States.

ï· ___________________________________________________ thatnarrowed the wide range of alternative accounting practices then inexistence.

In _______. the __________________________________ was formed tomeet the demand for more structured accounting standards. The APBissued pronouncements on accounting principles until _______. thepronouncements where known as _________________, when it wasreplaced by the __________________________________ .WheatCommitteeâs recommendations resulted in creation of FASB. The FASBrepresents the current rule-making body within the accountingprofession. The mission of the FASB is to establish and improvestandards of financial accounting and reporting for the guidanceand education of the public, which includes issuers, auditors, andusers of financial information.

The FASB differs from the predecessor APB in the following ways:a. __________________________________ b.__________________________________ c.__________________________________ d.__________________________________ e.__________________________________

In 1984, the FASB created the __________________________________.The purpose of the Task Force is to reach a consensus on how toaccount for new and unusual financial transactions that have thepotential for creating differing financial reporting practices.

The FASB issues two major types of pronouncements:

a. When the FASB issues a new standard it is refers as_________________________________to communicate changes to the FASBCodification. They are considered GAAP and must be followed inpractice. o How the FASB has changed US GAAP, including eachspecific amendment to the FASB Codification o Why the FASB decidedto change US GAAP and background information related to the changeo When the changes will be effective and the transition method.

b. __________________________________ The SFACs represent anattempt to move away from the problem-by-problem approach tostandard setting that has been characteristic of the accountingprofession. The Concept Statements are intended to form a cohesiveset of interrelated concepts, a conceptual framework that willserve as tools for solving existing and emerging problems in aconsistent manner. Unlike FASB statements, the Concept Statementsdo not establish GAAP.

Prior to 2009 the FASB issued several type of pronouncementswhich had different levels of authority. The type of pronouncementsare listed in descending order of relative weight of authority theyhad within GAAP

ï· __________________________________

ï· ______________ : these pronouncements refined GAAP byclarifying conflicting or unclear issues relating to previouslyissued standards

ï· ______________ FASB staff issued pronouncements to providemore timely and consistent application guidance and to make narrowand limited revision of standards.

ï· ______________: FASB staff issue these pronouncements toclarify and explain, or elaborate on accounting and reportingproblems.

ï· __________________________________

The FASB board members were CPAs. GAAP The FASB developed theFinancial Accounting Standards Board Accounting StandardsCodification _____________________________ to provide in one placeall the authoritative literature related to a particulartopic._________________________________________________________________________________________________________________

Major sources of GAAP: ï· _______________________________________ï· _______________________________________ ï·_______________________________________

Most countries have recognized the need for more globalstandards. _____________________________________________ and U.S.rule-making bodies are working together to reconcile U.S. GAAP withthe IASB _________________________________________

Major challenges in the financial reporting environment. ï·______________________________________________________________________ï·______________________________________________________________________

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1 Which of the following is an advantage of having a single set of accounting standards used worldwide?

A. Reduced accounting costs for multinational corporations

B. Increased power of the FASB

C. Reduced number of multinational corporations on the NYSE

D. Increased diversity of accounting methods used by multinational corporations

2 The accounting standards in code law countries tend to be:

A. very detailed.

B. formulated by organizations such as the FASB.

C. stated generally without much guidance on accounting procedures.

D. very conservative.

3 What is the likely result when accounting rules are left up to professional associations

rather than being legislated by governmental bodies?

A. Very general accounting rules are created, as in code law countries.

B. Very detailed rules for practice are created, as in common law countries.

C. Very general accounting rules are created, as in common law countries.

D. Very detailed rules for practice are created, as in code law countries.

4Historical cost is the primary basis for asset valuation under U.S. GAAP.

Why is historical cost NOT as important in the accounting systems of Latin America as in the U.S.?

A. Historical costs are too difficult to calculate in the currencies used in Central and South America.

B. The countries of Latin America have experienced very high rates of inflation,

which would make historical costs meaningless to readers of financial statements.

C. There is very little foreign direct investment in the countries of Latin America,

so few assets need to be accounted for.

D. In Latin America, asset prices are very stable, making historical costs ,

so it doesn't matter which valuation basis is used.

5Which of the following statements is true about accounting convergence?

A. Convergence is a synonym for harmonization.

B. Convergence is the opposite of standardization.

C. Convergence, unlike harmonization, takes place over a period of time.

D. Convergence means developing high-quality standards in partnership with national standards.

6 Which of the following statements is believed to be true about accounting convergence

by proponents of convergence?

A. Convergence would not affect the feelings of nationalism.

B. Convergence is desirable because there is very little difference among capital markets

in different countries.

C. Convergence would help to raise the quality of accounting practices internationally.

D. None of the above statements is true.

7Why does the IASB believe that a principles-based approach to standard setting

is superior to a rules-based approach?

A. Detailed guidance or rules encourage accountants to look for ways around the rules

rather than trying to provide useful information.

B. Principles-based standard setting is less costly to undertake than rules

-based standard formulation.

C. It is desirable to have all corporations in all countries using the same accounting practice.

D. A conceptual framework for standard setting has demonstrated to encourage

the greatest economic development.

8 If a company chooses the revaluation model permitted in IAS 16 for fixed asset measurement:

A. annual revaluations must be performed on each class of assets.

B. it must update the valuation so that the balance sheet represents fair value

on the balance sheet date.

C. appraisals must be performed by an official of the IASB.

D. the depreciated replacement cost must be used as the fair value of the fixed asset.

AYB311 Lecture Notes - Lecture 3: Accounting Principles Board, American Accounting Association, Conceptual Framework

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