Financial Accounting Standards

1
Financial Accounting Standards

• Chapter 1, SFAC 1, History Overview

2
Some History

• Double-entry bookkeeping made the Renaissance
  possible
• Industrial revolution made possible by cost
  accounting
• Railroads originated depreciation
• Capital markets depend on reliable financial
  reporting
• Next stage Continuous reporting using XTML

3
Evidence of Early Accounting

• Jericho, 10,000 BC Tokens, later in balls
• Sumeria, 3000 BC scribes record tributes to the
  rulers and temples on clay tablets based on the
  unit of 60, not decimals of 10
• Tablets and beads used in ancient Egypt
• Code of Hammurabi, 1700 BC contracts
• 700 BC Greeks invent coins, bills, and banking
• Rome learns inflationary effect of money
  production

4
Prerequisites for Modern Accounting

• Private property
• Commerce
• Writing
• Money
• Credit
• Math

5
Venetian System

• Crusades lead to increased European trade
• Medici family lends money on large scale
• Florentine merchant Manucci records of 1299 used
  double-entry
• First written about by Pacioli, but described as
  the Venetian System, implying its already in
  wide use
• Gutenberg press enabled printing and distribution
  of Summa

6
Cost Accounting, 18th Century

• Industrial Revolution depended on understanding
  of costs
• Josiah Wedgewood pioneered cost accounting

7
Britain Mid-19th Century

• British accounting profession really starts to
  develop
• Brits allow joint stock companies since 1600
  (East India), but unscrupulous men sell worthless
  stock
• British Companies Acts written in late 19th
  century

8
American Developments

• American railroads need massive investment
  develop depreciation
• Interstate Commerce Act of 1887
• U.S. Steel has first audited financial statements
  in 1903
• Frederick Taylors scientific management ? GMs
  cost accounting
• Stock market crash of 1929

9
Movement toward GAAP

• Securities Act of 1933 creates SEC
• Securities Exchange Act of 1934 mandates audited
  annual reports
• Auditing standards develop, as does concept of
  GAAP
• Professional begins to formulate GAAP
• IBM develops business computers

10
GAAP in the USA

• SEC formation
• CAP (of AICPA) c. 1939
• ARBs
• APB c. 1959
• APB Opinions
• FASB

11
SEC

• Created by Securities Act of 1933
• Has legal authority over GAAP
• Delegated standard setting to FASB in most cases
• Also has authority over auditing, shared with
  PCAOB
• Key enforcement agency

12
AICPA

• Primary professional organization of accountants
  in the USA
• Tried to set the standards through CAP and APB
• Not sufficiently independent
• Lost role in audit standards to PCAOB
• Still writes key guidance
• Code of professional conduct
• Audit and accounting guides

13
FASB

• Established in 1974 to be more independent than
  APB
• Full time members and staff researchers
• Writes SFAS and interpretations
• Concepts project
• Technical bulletins
• Emerging Issues Task Force

14
FASBs Due Process
Discussion Memorandum
Accounting Firms
Accounting Academics
Government Officials
Corporations
Public Hearing
Exposure Draft
15
FASBs Due Process
Exposure Draft
Accounting Firms
Accounting Academics
Government Officials
Corporations
Public Hearing
Statement on Financial Accounting Standards
16
GAAP Hierarchy
APB Opinions
AICPA Accounting Research Bulletins
17
SFAC 1

• The objectives in this Statement pertain to
  financial reporting and are not restricted to
  information communicated by financial statements.
• They are a principal means of communicating
  accounting information to those outside an
  enterprise.

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SFAC 1, continued

• Financial reporting is not an end in itself but
  is intended to provide information
• The financial statements now most frequently
  provided are
• balance sheet or statement of financial position
• income or earnings statement,
• statement of retained earnings, and statement of
  other changes in owners' or stockholders' equity,
  and (
• statement of changes in financial position
• Last has been replaced with Cash Flow Statement!

19
SFAC 1, continued

• Most productive activity in the United States is
  carried on through investor-owned business
  enterprises
• Production and marketing of goods and services
  often involve long, continuous, or intricate
  processes
• Most goods and services have money prices

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SFAC 1, continued

• Overriding objective
• Useful in making business and economic decisions
• Characteristics of accounting info
• primarily financial in nature
• pertains to individual business enterprises
• often results from approximate, rather than
  exact, measures
• reflects the financial effects of transactions
  and events that have already happened.
• benefits of information provided should be
  expected to at least equal the cost involved

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More Specific Objectives

• Information Useful in Investment and Credit
  Decisions
• Information Useful in Assessing Cash Flow
  Prospects
• Information about Enterprise Resources, Claims to
  those Resources, and Changes in them
• Helps investors, creditors, and others identify
  the enterprise's financial strengths and
  weaknesses and assess its liquidity and solvency.

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More Specific Objectives 2

• Enterprise Performance and Earnings
• primary focus of financial reporting is
  information about an enterprise's performance
• provided by measures of earnings and its
  components.
• Periodic earnings measurement
• Liquidity, Solvency, and Funds Flows

23
More Specific Objectives 3

• Management Stewardship and Performance
• Management Explanations and Interpretations