Financial Accounting Theory And Analysis: Text And Cases, 11th Edition Solution Manual

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1Accounting Theory and Analysis11thEditionSolutions Manual

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2Table of ContentsPage numberUsing the Codification to Solve theFASB ASCCases4Solutions ManualChapter 16Chapter 221Chapter 341Chapter 448Chapter 560Chapter 680Chapter 796Chapter 8110Chapter 9126Chapter 10142Chapter 11160Chapter 12181Chapter 13201Chapter 14213Chapter 15225Chapter 16246Chapter 17262

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4Usingthe Codification to Solve theFASB ASCCasesPrior to attempting to use the codification website to solve theFASB ASCcases, it isrecommended that you read “Test Driving the Codification,” by Carolyn Ford and C. WilliamThomas,Journal of Accountancy, December, 2008.Available athttp://www.journalofaccountancy.com/Issues/2008/Dec/TestDrivingtheCodification.htm,andreview the tutorials on the codification website.Overview of the CodificationTheFinancial Accounting Standards Boardcodification (FASB ASC) is organized intogeneral topics listed on the left-hand side of the home page (General Principles, Presentation,etc.). Clicking on any of the general topics will bring up what the FASB terms a “landing page.”Each landing page contains a list of sub topics for that link. For example clicking on the generaltopic Assets brings up list of seven sub topics (Cash and Cash Equivalents, Receivables, etc.).Notice that each of the subtopics is identified by a three digit number. This allows for access viathe go to function that we will discuss later.Clicking on any of the subtopics brings up a second link to what are termed sections andcontain the content specific area of the FASB ASC.All Subtopics have a set of standardSections unless there is nothing to include in a particularstandardsection, in which case thatstandardSection is left out of theSubtopic and therefore the FASB ASC. There are sixteenstandard Sections for each Subtopic.Sectionsareindicated by a two digit number between 00and 99. Some of the most frequently used sections are: 25 Recognition, 30 Initial Measurement35 Subsequent Measurement, 50 Disclosure and Implementation Guidance and Instructions.Each Section has Paragraph numbers that start over at the beginning of each Section.Each Paragraph, therefore, has a two-part number. The first number is the Section number, andthe second part is the Paragraph number within that Section. The Paragraphs are where“substantive content”of the FASB ASC is found.The rest of the levels only exist to organizethe information in the Paragraphs and help navigate to the informationcontained in them. Inorder to view the specific content areas, it is necessary to click on theJOIN ALL SECTIONStab found on each section page. For example, assume we are interested in the authoritativeliterature on accounting for sales of products when a right to return exists. First, click on thetopic Revenue at the left-hand side of the home page, then on the landing page RevenueRecognition. Next, click on the products subsection. Finally click theJOIN ALL SECTIONStab and all of the paragraph content will appear. Page down through the material and you willfind that Paragraph 25-1 contains the authoritative guidance for accounting for sales of productswith a right to return.The home page also gives other options for navigating the FASB ASC. Two of these arethe SEARCH function and theGO TOoption.We have found that using these functions is aneasy way to start navigating the FASB ASC. To use the search method of navigating the FASBASC, first, type the general topic in the search box at the top right of the FASB ASC homepage. This will give you some references to specific FASB ASC sections where the topic isdiscussed. Choose the section that seems most appropriate and type the reference number in theGO TObox at the top left-hand side of the FASB ASC homepage. Once you are redirected tothe desired section, click combine sections and all of the information on the topic will be

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5displayed. You can then browse through the material to find the appropriate subsection thataddresses the case issue. Let’s use this option to find the authoritative literature on accountingfor sales of products with a right to returnType “right to return,”in the search box at the topright of the FASB ASC web page.You will get references to the place where this issue isdiscussed. Seven possibilities appear, but in reviewing we see that the criteria are contained in605-15-25-1. Type this number in thebox next to theGO TOlink at the top left-hand side of theFASB ASC homepage.This will redirect you to the content specific paragraph that discussesaccounting for sales of products where a right of return exists. (Note: in some searches you maybe redirected to the section outline. If so, click theJOIN ALL SECTIONStab and all of theparagraph content will appear.If the issue involves accessing a previous specific pronouncement, it is also possible toaccess the topic through the cross reference function. On the home page, select Cross Reference.This feature allows you to access the relevant FASB ASC section by citing the original source.To use this feature, first access the drop down menu under Standard Type. (Standard Typerefers to the authoritative body that originally issued the pronouncement. For example theFinancial Accounting Standards Boards uses the acronym FAS. A discussion of the acronymsfor the various standard types is contained through a link in the directions). Next, use the dropdown menu under standard number and choose the appropriate number. Then clickGENERATE REPORT. When the results appear, click on the first paragraph number at the farright side. Next, click on the 3 digit topic at the top under Table of Contents. When the resultsappear, click and expand and all of the subtopics will appear. Choose the subtopic you wish toview and then combine sections and the relevant authoritative literature will be displayed.For example, to answer case 9-3, choose FAS from the drop down Standard Type menu.Then choose 143 from the standard number drop down menu. (Please note that the standardnumber for asset retirement obligations was misidentified in the case. It should be 143 not144).Click onGENERATE REPORTand when the results appear, click on 05-4 on the firstline under paragraph number. When the results appear, click 410 Asset Retirement andEnvironmental Obligations. When the results appear, the most appropriate section seems to be20 Asset Retirement Obligations. Select it and then click theJOIN ALL SECTIONStab and allof the paragraph content will appear.Finding original source material still contained in the CodificationSeveral of theFASB ASCcasesask for EITF pronouncements related to a particular topic. Inorder to find original source material from the EITF or any other authoritative body use thefollowing steps:1.Find the relevant topic in the FASB ASC2.Click expand for the relevant subtopic3.Click theJOIN ALL SECTIONStab4.From themenuselect Printer-friendly with sources5.Page through the material to find content originally sourced from the EITFƒ Page/Print functions

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6CHAPTER 1Case l-1a.The FASB had three primary goals in developing the Codification:1.Simplify user access by codifying all authoritative US GAAP in one spot.2.Ensure that the codified content accurately represented authoritative US GAAP as of July1,2009.3.Create a codification research system that is up to date for the released results ofstandard-setting activity.b.The Codification is expected toimprove accounting practice by:1.Reducingthe amount of time and effort required to solve an accounting research issue2.Mitigatingthe risk of noncompliance through improved usability of the literature3.Provide accurate information with real-time updates as Accounting Standards Updates arereleased4.AssistingtheFASB with the research and convergence efforts.c.The FASB ASC is composed of the following literature issued by various standard setters:1.Financial Accounting Standards Board (FASB)a. Statements (FAS)b. Interpretations (FIN)c. Technical Bulletins (FTB)d. Staff Positions (FSP)e. Staff Implementation Guides (Q&A)f. Statement No. 138 Examples.2.Emerging Issues Task Force (EITF)a. Abstractsb. Topic D.3.Derivative Implementation Group (DIG) Issues4.Accounting Principles Board (APB) Opinions5.Accounting Research Bulletins (ARB)6.Accounting Interpretations (AIN)7.American Institute of Certified Public Accountants (AICPA)a. Statements of Position (SOP)b. Audit and Accounting Guides (AAG)—only incremental accounting guidancec. Practice Bulletins (PB), including the Notices to Practitioners elevated to Practice Bulletinstatus by Practice Bulletin 1d. Technical Inquiry Service (TIS)—only for Software Revenue RecognitionAdditionally, in an effort to increase the utility of the FASB ASC for public companies, relevantportions of authoritative content issued by the SEC and selected SEC staff interpretations andadministrative guidance have been included for reference in the Codification, such as:1.Regulation S-X (SX)2.Financial Reporting Releases (FRR)/Accounting Series Releases (ASR)3.Interpretive Releases (IR)

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74.SEC Staff guidance in:a.Staff Accounting Bulletins (SAB)b.EITF Topic D and SEC Staff Observer commentsd.TheFASB ASC contains all current authoritative accounting literature. However, ifthe guidance for a particular transaction or event is not specified within it, the firstsource to consider is accounting principles for similar transactions or events within asourceofauthoritativeGAAP.Ifnosimilartransactionsarediscovered,nonauthoritative guidance from other sources may be considered. Accounting andfinancial reporting practices not included in the Codification are nonauthoritative.Sources of nonauthoritative accounting guidance and literature include, for example,the following:i.Practices that are widely recognized and prevalent either generally or in the industryii.FASB Concepts Statementsiii.American Institute of Certified Public Accountants (AICPA) Issues Papersiv.International Financial Reporting Standards of the International AccountingStandards Board Pronouncements of professional associations or regulatoryagenciesv.Technical Information Service Inquiries and Replies included in AICPA TechnicalPractice Aidsvi.Accounting textbooks, handbooks, and articlesCase 1-2a.Inclusion or omission of information that materially affects net income harms particularstakeholders.Accountants must recognize that their decision to implement (or delay) reportingrequirements will have immediate consequences for some stakeholders.b.Yes.Because the FASB standard results in a fairer presentation, it should be implemented assoon as possible--regardless of its impact on net income.c.The accountant's responsibility is to provide financial statements that present fairly the financialcondition of the company. By advocating early implementation, Hogerfulfills this task.d.Potentiallendersandinvestors,whoreadthefinancialstatementandrelyonitsfairrepresentation of the financial condition of the company, have the most to gain by earlyimplementation.A stockholder who is considering the sale of stock may be harmed by earlyimplementation that lowers net income (and may lower the value of the stock).Case 1-3a.CAP.The Committee on Accounting Procedure, CAP, which was in existence from 1939 to1959, was a natural outgrowth of AICPA (then AIA) committees, which were in existenceduring the period 1933 to 1938.The committee was formed in direct response to the criticismreceived by the accounting profession during the financial crisis of 1929 and the years thereafter.The authorization to issue pronouncements on matters of accounting principles and procedureswas based on the belief that the AICPA had the responsibility to establish practices that wouldbecome generally accepted by the profession and by corporate management.

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8As a general rule, the CAP directed its attention, almost entirely, to resolving specific accountingproblems and topics rather than to the development of generally accepted accounting principles.The committee voted on the acceptance of specific Accounting Research Bulletins published bythe committee.A two-thirds majority was required to issue a particular research bulletin.TheCAP did not have the authority to require acceptance of the issued bulletins by the generalmembership of the AICPA, but rather received its authority only upon general acceptance of thepronouncementbythemembers.Thatis,thebulletinssetforthnormativeaccountingprocedures that "should be" followed by the accounting profession, but were not "required" to befollowed.It was not until well after the demise of the CAP, in 1964, that the Council of the AICPAadopted recommendations that departures from effective CAP Bulletins should be disclosed infinancial statements or in audit reports of members of the AICPA.The demise of the CAPcouldprobably be traced byfour distinct factors:(1) the narrow nature of the subjects covered by thebulletins issued by the CAP,(2) the lack of any theoretical groundwork in establishing theprocedures presented in the bulletins,(3) the lack of any real authority by the CAP inprescribing adherence the procedures described by the bulletins, and (4) the lack of any formalrepresentation on the CAP of interest groups such as corporate managers, governmentalagencies, and security analysts.APB. The objectives of the APB were formulated mainly to correct the deficiencies of the CAPas described above.The APB was thus charged with the responsibility of developing writtenexpression of generally accepted accounting principles through consideration of the researchdone by other members of the AICPA in preparing Accounting Research Studies.Thecommittee was in turn given substantial authoritative standing in that all opinions of the APBwere to constitute substantial authoritative support for generally accepted accounting principles.If an individual member of the AICPA decided that a principle of procedure outside of theofficial pronouncements of the APB had substantial authoritative support, the member had todisclose the departure from the official APB opinion in the financial statements of the firm inquestion.ThemembershipofthecommitteecomprisingtheAPBwasalsoextendedtoincluderepresentation from industry, government, and academe.The opinions were also designed toinclude minority dissents by members of the board.Exposure drafts of the proposed opinionswere readily distributed.The demise of the APB occurred primarily because the purposes for which it was created werenot being accomplished.Broad generally accepted accounting principles were not beingdeveloped. The research studies supposedly being undertaken in support of subsequent opinionsto be expressed by the APB were often ignored.The committee in essence became a simpleextension of the original CAP in that only very specific problem areas were being addressed.InterestgroupsoutsideoftheaccountingprofessionquestionedtheappropriatenessanddesirabilityofhavingtheAICPAdirectlyresponsiblefortheestablishmentofGAAP.Politicization of the establishment of GAAP had become a reality because of the far-reachingeffects involved in the questions being resolved.FASB. The formal organization of the FASB represents an attempt to vest the responsibility ofestablishing GAAP in an organization representing the diverse interest groups affected by theuse of GAAP. The FASB is independent of the AICPA. It is independent, in fact, of any privateor governmental organization.Individual CPAs, firms of CPAs,accounting educators, and

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9representatives of private industry will now have anopportunity to make known their views tothe FASB through their membership on the Board.Independence is facilitated through thefunding of the organization and payment of the members of the Board.Full-time members arepaid by the organization and the organization itself is funded solely through contributions. Thus,no one interest group has a vested interest in the FASB.Conclusion.TheevolutionofthecurrentFASBcertainlydoesrepresent"increasingpoliticization of accounting standard setting."Many of the efforts extended by the AICPA canbe directly attributed to the desire tosatisfy the interests of many groups within our society. TheFASB represents, perhaps, just another step in this evolutionary process.b.Arguments for politicization of the accounting rule-making process:1.Accounting depends in large part on public confidence for its success.Consequently,the critical issues are not solely technical, so all those having a bona fide interest in theoutput of accounting should have some influence on that output.2.There are numerous conflicts between the various interest groups.In the face of this,compromise is necessary, particularly since the critical issues in accounting are valuejudgments, not the type which are solvable, as we have traditionally assumed, usingdeterministic models.Only in this way (reasonable compromise) will the financialcommunity have confidence in the fairness and objectivity of accounting rule making.3.Over the years, accountants have been unable to establish, on the basis of technicalaccountingelements, rules,which would bringaboutthedesired uniformityandacceptability. This inability itself indicates rule setting is primarily consensual in nature.4.The public accounting profession, through bodies such as the Accounting PrinciplesBoard, made rules which business enterprises and individuals "had" to follow.Formany years, these businesses and individuals had little say as to what the rules would be,in spite of the fact that their economic well being was influenced to a substantial degreeby those rules.It is only natural that they would try to influence or control the factorsthat determine their economic well being.c.Arguments against the politicization of the accounting rule-making process:1.Many accountants feel that accounting is primarily technical in nature.Consequently,they feel that substantive, basic research by objective, independent and fair-mindedresearchers ultimately will result in the best solutions to critical issues, such as theconcepts of income and capital, even if it is accepted that there isn't necessarily a single"right" solution.2.Even if it is accepted that there are no "absolute truths" as far as critical issues areconcerned, many feel that professional accountants, taking into account the diverseinterests of the various groups using accounting information, are in the best position,because of their independence, education, training, and objectivity, to decide whatgenerally accepted accounting principles ought to be.3.The complex situations that arise in the business world require that trained accountantsdevelop the appropriate accounting principles.

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104.The use of consensus to develop accounting principles would decrease the professionalstatus of the accountant.5This approach would lead to "lobbying" by various parties to influence the establishmentof accounting principles.Case 1-4a.The term "accounting principles" in the auditor's report includes not only accounting principlesbut also\practices and the methods of applying them. Although the term quite naturallyemphasizes the primary or fundamental character of some principles, it includes general rulesadopted or professed as guides to action in practice. The term does nothowever,meanrulesfrom which there can be no deviation. In some cases the question is which of several partiallyrelevant principles has determining applicability. Neither is the term "accounting principles"necessarily synonymous with accounting theory. Accounting theory is the broad area of inquirydevoted to the definition of objectives to be served by accounting, the development andelaboration of relevant concepts, the promotion of consistency through logic, the elimination offaulty reasoning, and the evaluation of accounting practice.b.Generally accepted accounting principles are those principles(whether or not they have onlylimited usage) that have substantial authoritative support. Whether a given principle hasauthoritative support is a question of fact and a matter of judgment.Since September 15, 2009the primary source of GAAP has been the FASB’s accounting standards codification. However,if the guidance for a transaction or event is not specified within a source of authoritative GAAPfor that entity, an entity shall first consider accounting principles for similar transactions orevents within a source of authoritative GAAP for that entity and then consider nonauthoritativeguidance from other sources (FASB ASC 105-10-5-2)..The CPA is responsible for collectingthe available evidence of authoritative support and judging whether it is sufficient to bring thepractice within bounds of generally accepted accounting principle.c.The auditor’s report states that a company’s financial statements present “fairly,” in all materialrespects, itsfinancial position,based on his or her judgmentas to whetherthe accountingprinciples selected and applied havegeneral acceptanceandthatthe accounting principlesselectedare appropriategiventhe circumstances. This statement is necessary because there aremanyareaswherecompaniesmakechoicesamongandbetweenaccountingprinciples(Depreciationmethod, inventory cost flow assumptions, etc).Therefore,, it is expected thatfinancial reports are prepared in a mannerthat reflectsthe underlying economic events andactivities of the reporting entity.This expectation was stressed inSAS No. 90whichstated, "Ineach SEC engagement, the auditor should discuss with the audit committee the auditor'sjudgments about the quality, not just the acceptability, of the entity's accounting principlesapplied in its financial reporting. Thediscussion should also include items that have a significantimpact on the representational faithfulness, verifiability, and neutrality of the accountinginformation included in the financial statements.“As a consequence, the choicesof accountingprinciplesmade by one companyareoften different than those made by another company.Case 1-5Afactor that influenced the development of accounting during the 19th century was theevolution of joint ventures into business corporations in England. The fact that many individuals,external to the business, needed information about the corporation's activities created the

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11necessity for periodic reports. Additionally, the emerging existence of corporations created theneed to distinguish between capital and income.The statutory establishment of corporations in England in 1845 stimulated the development ofaccounting standards, and laws were subsequently passed that were designed to safeguardshareholders against improper actions by corporate officers. Dividends were required to be paidfrom profits, and accounts were required to be kept and audited by persons other than thedirectors. However, initially anyone could claim to be an accountant, as there were no organizedprofessions or standards of qualifications.The industrial revolution and the succession of Companies Acts in England also served toincrease the need for professional standards and accountants. In the later part of the 19th century,the industrial revolution arrived in the United States, and with it came the need for more formalaccountingproceduresandstandards.Thisperiodwasalsocharacterizedbywidespreadspeculation in the securities markets, watered stocks, and large monopolies that controlledsegments of the United States economy.In the19thcenturythe progressive movement was established in the United States, and in 1898the Industrial Commission was formed to investigate and report on questions relating toimmigration, labor, agriculture, manufacturing, and business. Although no accountants wereeither on the Commission or used by the Commission, a preliminary report issued in 1900suggested that an independent public accounting profession should be established in order tocurtail observed corporate abuses.Although most accountants did not necessarily subscribe to the desirability of the progressivereforms, the progressive movement conferred specific social obligations on accountants. As aconsequence accountants generally came to accept three general levels of progressiveness: (1) afundamental faith in democracy, a concern for morality and justice and a broad acceptance of theefficiency of education as a major tool in social amelioration; (2) an increased awareness of thesocial obligation of all segments of society and introduction of the idea of accountability to thepublic of business and political leaders; and (3) an acceptance of pragmatism as the mostrelevant operative philosophy of the day.The major concern of accounting during the early 1900s was the development of a theory thatcould cope with corporate abuses that were occurring at that time, and capital maintenanceemerged as a concept. This concept evolved from maintaining invested capital intact, to themaintenance of the physical productive capacity of the firm, to the maintenance of real capital.In essence this last view of capital maintenance was an extension of the economic concept ofincome (see Chapter 3) that there could be no increase in wealth unless the stockholder or thefirm were better off at the end of the period than at the beginning.During the period 1900-1915 the concept of income determination was not well developed.There was, however, a debate over which financial statement should be viewed as mostimportant, the balance sheet or the income statement. Implicit in this debate was the view thateither the balance sheet or the income statement must be viewed as fundamental and the otherresidual, and that relevant values could not be disclosed in both statements.The1904InternationalCongressofAccountantsmarkedtheinitialdevelopmentoftheorganized accounting profession in the United States, although there had been earlier attempts toorganize and several states had state societies. At this meeting, the American Association of

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12Public Accountants was formed as the professional organization of accountants in the UnitedStates. In 1916, after a decade of bitter interfactional disputes, this group was reorganized intothe American Institute of Accountants (AIA).The American Association of the University Instructors in Accounting was also formed in 1916.Initially this group focused on matters of curriculum development, and it was not until muchlater that it attempted to become involved in the development of accounting theory.World War I changed the public's attitude toward the business sector. Many people believed thatthe successful completion of the war could be, at least partially, attributed to the ingenuity ofAmerican businesses. As a consequence, the public perceived that business had reformed, andexternal regulation was no longer necessary. The accountant's role changed from a protector ofthird parties to the protector of business interests.Criticsofaccountingtheoryduringthe1920ssuggestedthataccountantsabdicatedthestewardship role, placed too much emphasis on the needs of management, and permitted toomuch flexibility in financial reporting. During this time financial statements were viewed as therepresentations of management, and accountants did not have the ability to require businesses touse accounting principles they did not wish to employ.Case 1-6a.Historically, accounting has been considered a highly trustworthy profession. Public accountingfirmstrainednewaccountants in the audit function with oversight from senior partners whobelieved that their firm’s integrity rode on every engagement. That is, new auditors wereassigned client responsibility after minimal formal audit training. Most of the training of newaccountants took place on-site, and the effectiveness of the new auditor depended on theeffectiveness of the instructor.CPA firms have always called their customers “clients” and have worked hard to cultivate them.Partners routinely entertained clients at sporting events, country clubs, and restaurants, and manyCPA firm employees later moved on to work in their clients’ firms. Any conflicts in theserelationships were, at least partially, offset by the CPA firm’s commitment to professionalethics.These relationships changed as information technology advisory services grew in the late 1970sand early ’80s. Also in the mid-1980s, the AICPA lifted its ban on advertising. As a result,revenue generation became more critical to partners’ compensation. Thereafter, the profitstructure of CPA firms changed dramatically and in 1999, revenues for management consultingaccounted for more than 50 percent of the then Big Five’s revenue.As a result, the audit function evolved into a loss leader that public accounting firms offered inconjunction with vastly more lucrative consulting engagements. But as pubic accounting firmscompeted more aggressively on price for audit engagements, they were forced by costconsiderations to reduce the number of procedures performed for each client engagement. Thisresulted in increased test of controls and statistical models, and fewer of the basic, time-consuming tests of transactions that increase the likelihood of detecting fraud. In addition, juniorauditors were frequently assigned the crucial oversight roles usually filled by senior partners,who were otherwise engaged in marketing activities to prospective clients. This reduced theeffectiveness of the instructor–new accountant training process.

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13b.1. Arthur Andersen, formerly one the Big Five audit firms, has gone out of business.2. In July 2002, President George W. Bush signed into law the Sarbanes-Oxley Bill, whichimposes a number of corporate governance rules on publicly traded companies3. Establishment of PCAOB.Case 1-7a.The structure of the FASB is as follows. A board of trustees nominated by organizations whosemembers have special knowledge and interest in financial reporting is selected. Theorganizations originally chosen to select the trustees were the American AccountingAssociation; the AICPA; the Financial Executives Institute; the National Association ofAccountants (The NAA’s name was later changed to Institute of Management Accountants in1991) and the Financial Analysts Federation.In 1997 the Board of Trustees added four membersfrom public interest organizations.The board that governs the FASB is the Financial AccountingFoundation (FAF). The FAF appoints the Financial Accounting Standards Advisory Council(FASAC), which advises the FASB on major policy issues, the selection of task forces, and theagenda of topics. The number of members on the FASAC varies from year to year. The bylawscall for at least twenty members to be appointed. However, the actual number of members hasgrown to about thirty in recent years to obtain representation from a wider group of interestedparties.The FAF appoints the Financial Accounting Standards Advisory Council, which advises theFASB on major policy issues, the selection of task forces, and the agenda of topics. The FAF isalso responsible for appointing the seven members of the FASB and raising the funds to operatethe FASB. The FAF currently collects in excess of $23million a year to support the activities ofthe FASB.b.The members of the Financial Accounting Foundation are nominated by electors from nineorganizations that support the activities ofthe FASB. These nine organizations are the AICPA,the Financial Executives Institute, the National Association of Accountants, theFinancialAnalystsFederation, the American Accounting Association, the Security Industry Association,and three not-for-profit organizations.FASB ASC1-1Variable Interest Entities(VIEs)Special purpose entities are accounted for by using the requirements for variable interest entities(VIEs). The information for this question is found by searching the topic “variable interestentities.”1.The definition of variable interest entities iscontained in FASB ASC 810-10-25-202.The guidance of the consolidationof VIEs is contained in 810-10-05-8 to 13.FASB ASC 1-2 Status of ARBsFirst search the glossary for the three termsRevenue recognition topic 605

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14Treasury stock topic 505-30Comparative financial statements topic 205ThenSearch ARB 43 in cross referenceLook for topic 605 (revenue) in the resultsTreasury StockSearch ARB 43 in cross referenceLook for topic 505-30(treasury stock) in the resultsComparative Financial StatementsSearch ARB 43 in cross referenceLook for topic 205 (comparative financial statements ) in the results205-10-45 Use print function printer friendly with sourcesFASB ASC 1-3 Accounting for the Investment Tax CreditSearch investment tax creditFound at740-10-25-45 746740-10-47-27 & 28FASB ASC 1-4 SEC Comments1.Search revenue recognitionFound undercustomer payment and incentives 605-50-S99-1Comments Made by SEC Observer at Emerging Issues Task Force (EITF) Meetings2.Search debt with conversions and other optionsFound under470-20-S99Comments Made by SEC Observer at Emerging Issues Task Force (EITF) Meetings3.Searchsoftware cost of sales and services

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15Found under985-705-S99Comments Made by SEC Observer at Emerging Issues Task Force (EITF) MeetingsFASB ASC 1-5 GAAP GuidelinesSearch “generally accepted accounting principles.”Found under 105-10Room for DebateDebate 1-1This question has no one correct answer.It is meant to get students talking about something thatthey probably haven’t thought about before.Students in favor of the SEC being the rule making body could argue that the FASB has failed toensure that financial statements fairly presentthe resultsofoperations.They could then cite therecent scandals.They could argue that the SEC has the power to regulate and they don’t seewhy the profession should then need to be self regulated.They could also argue that under theFASB there is too much flexibility and too much reliance on managerial intent, thereby allowingmanagement to manage earnings and otherwise manipulate its financial statements.Moreover,lack of exercise of government direct oversight could resultindiminishingthe effectiveness ofaccountants to audit due to a potential erosion of independence.They could point to Sarbanes-Oxley.Students in favor of the FASB making the rules could argue against big government.Theycould point out that government sets accounting standards in countries that are not capitalistic.The result in those countries is a cookie cutter approach to financial statements and lack offlexibility that leaves no room for professional judgment.Whereas, the standards provided bythe FASB are aimed to provide financial statements that fairly present financial statements,taking into consideration the circumstances in which a company operates.They could also arguethat accountants, not government officials, best understand their role and how best to measureand report financial information.Debate 1-2 Should the scope of accounting standards be narrowed further?Team 1.This question should prompt the student to investigate how management might benefit fromalternative accounting choices. They can go to the web and find out that accounting choicesprovide managerial incentives that are either income increasing or income decreasing. Theymay also find instances that management can choose methods of presenting financialinformation that make the company appear less risky.Income-increasing choices afford management the ability to paint a better picture of companyperformance. Management may be inclinedto select income increasing policies because

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16•they believe the stock market will react favorably and their own personal wealth andposition in the firm may be more secure.•their bonus may be tied to the bottom line.•The company may appear better able to pay suppliers and thus may be in a better position tonegotiate favorable terms with suppliers•The company may appear better able to repay debt and thus look good to a lender.•Students can cite real-world examples, eg., World Com capitalized expensesIncome-decreasing choices may be selected by companies that•Are highly regulated, such as utility companies. Poor performance can support the notionthat the company deserves a rate increase•If a company is having a bad year, it may choose to load up the income statement withexpenses and losses so that it will appear better off in future years.•Have labor unions hope to farebetter in negotiations for labor contractsCompanies have used off-balance sheet financing to improve the perception of a company’sriskiness. Enron is a prime example. Enron used special purpose entities to hide debt frominvestors.The student can also argue that accounting choice can be used to provide more relevant financialstatements. For example, SFAS 115 provides choices that are intended to result in financialsthat better disclose the results of management investment choices.Team 2.All of the above can be used as arguments against the proliferation of accounting choices.Narrowing accounting choices has been a goal of accounting professionals for many years. Forexample, one of the objectives of the APB was to narrow areas of difference in GAAP.Critics maintain that management is allowed too much leeway in the selection of the accountingprocedures used in corporate financial reports. These criticisms revolve around two issues (1)Executive compensation is frequently tied to reported earnings, so management is inclined toadopt accounting principles that increase current revenues and decrease current expenses and (2)the value of a firm in the marketplace is determined by its stock price. This value is highlyinfluenced by financial analysts’ quarterly earnings estimates. Managers are fearful that failingto meet these earnings estimates will trigger a sell-off of the company’s stock and a resultantdecline in the market value of the firm.The large number of accounting frauds that were evident during recent years provide examplesof the ways that management has manipulated financial statement in order to fool the public.Many of these cases might not have occurred if management were not afforded the discretion tochoose accounting procedures and practices. In short, accounting choice can result in earningsmanagement, fraudulent financial reporting, a lack of financial statement transparency, financialstatements that are not reliable, and financial statements that are biased.WWWCase 1-8

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