STANDARD SETTING Why do we need standards?

Who sets the standards in the U.S.? SEC (Securities and Exchange Commission)

FASB (Financial Accounting Standards Board)

Before FASB: Committee On Accounting Procedures (CAP) Accounting Research Bulletins (ARBs) Accounting Principles Board (APB) APB Opinions (APBOs) Currently: Accounting Standards Codification (ASC)

What about SOX?

How are standards set?

Advantages:

Disadvantages:

How do we know standards are followed?

International Financial Reporting Standards (IFRS) Reason for global accounting standards:

Difficulties/Drawbacks:

Current Status:

CONCEPTUAL FRAMEWORK Purpose: To set forth fundamentals on which financial reporting standards are based
The FASB and the IASB are currently working on a joint project to revise the conceptual framework where it is incomplete and inconsistent. SFAC No. 8 Chapters 1 and 3 have been completed to date.

SFAC #8, Ch. 1 Objective of General Purpose Financial Reporting Provide financial information about the reporting entity that is useful to existing and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers. SFAC #8, Ch. 3 Qualitative Characteristics of Useful Financial Information Fundamental Qualitative Characteristics: Relevance: capable of making a difference in a decision made by users

Faithful Representation: depicts the economic phenomena it purports to represent

Enhancing Qualitative Characteristics: Comparability (and consistency)

Verifiability

Timeliness

Understandability

Constraints: Cost Effectiveness

Materiality

What about Conservatism?

SFAC #6 Elements of Financial Statements Assets probable future economic benefit obtained or controlled by a particular entity as a result of past transactions Liabilities probable future sacrifices of economic benefit resulting from a present obligation of a particular entity as a result of past transactions Equity residual ownership interest (assets less liabilities) o Transactions with owners

o Comprehensive Income Comp Inc. = NI + Other Comp. Income

Revenue Expenses + Gains - Losses o Revenues: Gains:

o Expenses:

Losses:

SFAC #5 Recognition and Measurement in Financial Statements Recognition: The process of recording an item in the financial statements What is the alternative to recognition?

Criteria for recognition: Definitions the item meets the definition of an element of financial statements Measurability the item has an attribute you can measure Five different attributes currently used in practice: 1. Historical cost 2. Current cost 3. Market Value 4. Net Realizable Value 5. Present value of future cash flows Relevance the attribute is relevant Reliability the attribute is reliably measured Which measurement is the most common for recognition? Why?

Recent Trends: Fair Value Accounting An irrevocable option to value some or all financial instruments at fair value What is fair value?

Measuring fair value: FASBs Hierarchy (ASC 820-10-35): Level 1: Most desirable: quoted market prices in active markets for identical assets or liabilities Level 2: Inputs other than quoted prices that are observable for the asset or liability. Comparison to similar assets or liabilities in active or inactive markets; inputs derived from observable related market data Level 3: Least desirable: Unobservable inputs that reflect entitys own assumptions; based on best information available in the circumstances What are the benefits of fair value accounting?

What are the shortcomings?

Movement to balance-sheet approach