Accounting standards and conceptual frameworks

I. Standard setting bodies in the U.S – SEC(securities and exchange commission) has the legal
authority to establish u.s. generally accepted accounting principles (Gaap). Sec has allowed
accounting profession to establish gaap and self regulate. (see book)
a. Securities and exchange commission (SEC) – all companies that issue securities in the
united states are subject to sec rules and regulation.
b. Financial accounting standards board (FASB) – in 1973 independent full-time
organization established and has determined GAAP since then.
II. U.S. GAAP – FASB Accounting standards codification – effective july 1, 2009 the FASB
Accounting Standards Codification became the single source of authoritative
nongovernmental U.S. GAAP. Accounting and financial reporting practices not included in
the codification are not GAAP.
a. Authoritative Literature included in the Codification – FEDPRIA (mnemonic)
1. Financial Accounting Stadnards Board (FASB)
a. Statements of financial accounting standards
b. Interpretations
c. Technical bulletins
d. Staff positions
e. Staff implementation guides
f. Statement no. 138 examples
2. Emerging issues task force (EITF) abstracts and Topic D
3. Derivative implementation group issues
4. Accounting principles and board opinions
5. Accounting research bulletins
6. American institute of certified public accountants (AICPA)
a. Statements of position
b. Auditing and accounting guides (incremental accounting
guidance only)
c. Practice bulletins
d. Technical inquiry service (for software revenue recognition)
b. Sec standards included in the codification (see book)
c. On going standard setting process – see book – accounting standards update are not
authoritative literature. All new Gaap and sec amendments are fully intergrated into the
existing structure of codification.
III. International accounting stadnards board (IASB) – purpose of IASB is to develop a single set
of high quality, global accounting standards.
a. International financial reporting interpretations committee(IRFIC)- provide guidance on
newly identified financial reporting issues not addressed in the IFRSs and assists the
IASB in achieving international convergence of accounting standards
IV. Internal financial reporting standards (IFRS) – when created it adopted the international
accounting standards (IAS)
V. International Convergence of accounting Standard – goal of project is a single set of high
quality, international accounting standards that companies can use for both domestic and
cross border financial reporting.
VI. Conceptual frameworks underlying financial accounting – fasb has created conceptual
framework(statements of financial accounting concepts, or sfac) that serves as a basis for all
FASB pronouncements.(basic reasoning) .
a. SFAC no. 1 (not GAAP) “objectives of financial reporting by business enterprises” –
disclose entity’s performance. Includes external users (investors, creditors and
customers)

OBJECTIVES provide – focus on informational needs of external users

1. Informational useful in investment and credit decisions

2. Informational assessing future cash flow prospects(VALUE)
3. Information useful in assessing enterprise resources, the debt and
equity claims and change in them (risk/required rate of return)
b. SFAC no. 2 “Qualitative characteristics of accounting information” – most useful
information

Financial information must be (benefits):

 Understandable to decision makers

 Relevant (timely information with predictive or feedback value)
 Reliable (verifiable, faithfully representable and neutral)
 Comparable consistent
 Material
 Less costly than the benefit provided (Benefit > cost)
I. Illustration of hierarch of external users ( SEE BOOK)
a. Constraints
i. (U.S. gaap) 2 pervasive constraints
1. Cost and benefits ( benefits > cost of obtaining and presenting info)
2. Materiality – material with respect to financial statements(lack of
info could make difference in decision
b. BUD
i. Benefits > costs
ii. Understandability
iii. Decision usefulness
c. Primary decision qualities – RELEVANCE and RELIABILITY
i. Relevance PFT(passing feels terrific) information must be relevant to
decision process
1. Predictive value – has ability to assists users in evaluating past,
present or future events
 2. Feedback value – confirms prior expectations or to adjust or correct
the assessment made
3. Timeliness – available while it is able to influence decisions
ii. Reliability NRFV (nobody relies on financials unless verified) – must be able
to depend on it to free from error bias and faithfully represent what it
claims.
1. Neutrality – free from bias and outside influence
2. Representational faithfulness – agreement b/t financial reporting
and resources or events represent
3. Verifiability – objective could be duplicated with same techniques
d. Secondary characteristics – comparability and consistency both apply to both
relevance and reliability
i. Comparability (Microsoft vs. apple computers) – identify similarities and
differences b/t economic phenomena.
ii. Consistency – current year vs. prior year – accounting policies and
procedures must be applied by the company from period to period.
e. Sfac no.7 “using cash flow information and present value in accounting
measurements”- provides a framework for accountants to employ when using
future cash flows as a measurement basis for assets and liabilities
i. Five elements of present value measurement (asset or liability) – used as the
basic for determining measurement objective sfac no. 7
1. Estimate of future cash flow
2. Expectations about timing variations of future cash flows
3. Time value of money (the risk free rate of interest) impacts
4. The price for bearing uncertainity – credit risk discount
5. Other factors (liquity issues and market imperfections) rate &/or FCF
ii. Fair value objective – if fairvalue cant be determined obtain estimate
iii. Present value computations – 2 approaches
1. Traditional approach –( present value bonds – schedule known payments) – interest rate
important
2. Expected cash flow approach uses risk free rate of return as discount rate
a. Expected cash flow (pv warranties – uncertain future payments)-weighted average
or expected future cash flow

BOSSII

B accounting research bulltins

O accounting principles board opinions

S fasb statements of financial accounting standards

S fasb staff positions

I fasb interpretations

I fasb statement 133 implementation issues

Uvote – sfac defines the following elemtns of present value measure idenitified by menomic uvote

U the price of bearing uncertainity

V expectations about timing variations of future cash flows

O other factors (e.g. liquidty issues and market imperfections

T time value of money (risk – free rate of interest)

E Estimate of future cash flow

I. INCOME STATEMENT (performance for a period of time) – useful in determining

profitability, value for investment purposes, and credit worthiness.
II. Presentatioon order of the major components of an income and retained earnings
statement – IDEA (mnemonic)

Reported on income statement

a. Income (or loss) from Continuing operations (individual line items show “gross of
tax”/before, then total reported “net of tax
b. Income (or loss) from discontinued operations (report “net of tax”)
c. Extraordinary items (reported “net of tax”)

Reported on statement of Retained earnings

d. Cumulative effect of change in accounting principle (reported “net of tax”) GRule –

change from one acceptable method of accounting to another (“GAAP to GAAP”)
because the new method presents the financial information more fairly than the old
method

Income from continuing operations

 I. Multiple set income statement (see book page f1-19)
2 sections for continuing operations revenue – normal operations and non operating

Discontinued operations and exit disposal activities

I. Introduction to discontinued operations - the (normal) loss form disconintued operations

can consist of an impairment loss, a gain/loss from actual operations, and a gain/loss or
disposal. All of these amounts are included in discontinued operations in the period in which
they occur. (not before)
II. Definitions
a. Component of an entity (see book) f1-21
i. U.s. gaap
ii. IFRS
1. A separate major line of business or geographical area of operations
2. A subsidiary acquired exclusively with a view to resale
iii. HELD FOR SALE – component of a business (U.S. gaap) or a disposal group (IFRS)
is classified as “held for sale” in which all criteria is met
1. Management commits to plan to sell component
2. Component is available for immediate sale in its present condition
3. An active program to locate a buyer has been initiated
4. The sale of the component is probable and the sale is expected to be
complete within one year
5. The sale of the component is being actively marketed
6. Actions required to complete the sale make it unlikely that significant
changes to the plan will be made or that plan will be withdrawn.
III. Accounting rules
a. Types of entities to be considered discontinued operation if either the component
i. Has been disposed of;or
ii. Is classified as held for sale
b. Conditions that must be present – both conditions must be met to report in
discontinued operations the result of operations of a component that has been disposed
of or is held for sale
i. Eliminated from ongoing operations – operations and cash flows have (or will
be) eliminated from ongoing operations of the entity as a result of the disposal
ii. No significant continuing involvement - no involvement in operations after
disposal
c. Discontinued operations calculation
i. Types of items included in results of discontinued operations (for that period
1. Results of operations of the component
2. Gain or loss on disposal of the component
 3. Impairment loss (and subsequent increases in fair value) of the
component
(1) Initial and subsequent impairment losses – a loss is
recognized for recording the impairment of the
component (i.e. any initial or subsequent write down
to fair value less cost to sell.)
(2) Subsequent increases in fair value – a gain is
recognized for any subsequent increase in fair value
minus the costs to sell (but not in excess of previously
recognized cumulative loss)
ii. Report in the period disposed of or held for sale – results of subsequent
operations of a component classified as held for sale are reported in
discontinued operations in the period in which they occur
iii. Depreciation and amortization – assets within the component are no longer
depreciated or amortized.

Example on page f1-23

IV. Exit or disposal activities – new – recognition of a liability for the costs associated with an
exit or disposal activity
a. Exit and disposal costs include
i. Involuntary employee termination benefits
ii. Costs to terminate a contract that is not a capital lease
iii. Other costs associated with exit or disposal activities, including costs to
consolidate facilities or relocate employess
b. Criteria for liability recognition – by itself is not enough to result in recognition / only
when all of following are met
i. An obligating event has occurred
ii. The event results in present obligation to transfer assets or to provide services
in the future, and
iii. The entity has little or no discretion to avoid the future transfer of assets or
providing services

Future operating losses expected to be incurred as part of an exit or disposal

activity are recognized in the period(s) incurred.

c. Liability measurements – liability should be measured at fair value. Revisions are

accounted for prospectively (change in estimate)
d. Disclosure in the notes – (f1-26)

EXTRAordinary items

I. Extraordinary items –(significant and infrequent)

i. Material in nature
 ii. Of a character significantly different from the typical or customary business
activities
iii. Not expected to recur in forseeable future , (infrequent)
iv. Not normally considered in evaluating the ordinary operating results of an
enterprise
b. Disclosed separately in income statement , net of any related tax effects, after
discontinued operations
c. Examples – pg f1-27
d. Examples of non-extraordinary items – (presented as component of “continuing
operations”) gross , before tax
i. Gain or loss from sale or abandonment of property, plant and equipment.
ii. Large write downs or write-offs of
1. Re
iii. Gain or loss from foreign currency transaction or translation
iv. Losses from major strike by employees
v. Long term debt extinguishments that are part of a common management
strategy
II. Material unusual or infrequent items – non operating – i.e. sale of a factory building

Ifrs prohibits reporting extraordinary items

Accounting changes and error corrections

I. General
a. Changes in accounting estimate – PROSPECTIVE
b. Changes in accounting principle – GR “retro”
c. Changes in accounting entity – RESTATE
Error corrections are not considered accounting changes
II. Changes in accounting estimate (prospective) not an error – do not restate prior periods
a. Events resulting estimate changes
i. Changes in the lives of fixed assets
ii. Adjustments of year-end accrual of officers salaries and/or bonuses
iii. Write-downs of obsolete inventory
iv. Material non-recurring IRS adjustments
v. Settlement of litigation
vi. Changes in accounting principle that are inseparable from a change in estimate
(a change from the installment method to immediate recognition method
because uncollectible accounts can now be estimated)
Example pg. f1-29
III. Changes in accounting principle (retrospective application-GR) –acceptable accounting
principles only
 a. Rule of preferability – may be changed only if required by GAAP/IFRS or preferable and
more failry presents information

b. Nonrecurring changes – should not be made for a transaction or event in the past that
c. has been terminated or nonrecurring
d. Effects of a change
i. Direct effects – change in account principle are adjustments that would be
necessary to restate the financial statements of prior periods
ii. Cumulative effect – (pg f1-30)
IV. Changes in accounting entity – (retrospective application) restate
a. Restatement to reflect information for the new entity (if comparative financial
statemtns are presented)
V. Error correction (prior period adjustment) restate
a. Example statement of retained earnings(with restatement effects) ex. Page f1-34