FINANCIAL ACCOUNTING THEORY AND ANALYSIS:

TEXT AND CASES

10TH EDITION
RICHARD G. SCHROEDER MYRTLE W. CLARK JACK M. CATHEY

CHAPTER 1
THE DEVELOPMENT OF ACCOUNTING THEORY

Introduction

What is theory?

Webster defines theory as:

Systematically organized knowledge, applicable in a relatively wide variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.

Normative theory Positive theory

Why is the development of a general theory of accounting important? What is the relationship of accounting research to accounting theory?

THE EARLY HISTORY OF ACCOUNTING

Zenon Papyri Renaissance

Fra Luca Pacioli

The evolution of joint ventures into ongoing businesses The impact of the industrial revolution and the progressive movement The concept of capital maintenance The accountant as a protector of business interests

ACCOUNTING IN THE UNITED STATES SINCE 1930

Meetings between NYSE and AIA AAA SEC

Securities Act of 1933 Securities Exchange Act of 1934

Committee on Accounting Procedure Accounting Principles Board Financial Accounting Standards Board

THE ACCOUNTING PRINCIPLES BOARD

Formation and structure Types of pronouncements

APB Opinions APB Opinions 2 & 4

Accounting for the investment tax credit (1961)

Rule 203 Criticism of the APB

Independence of members Structure Response time

THE FINANCIAL ACCOUNTING STANDARDS BOARD

The Wheat Committee The Trueblood Committee The FASB was established

Structure of the FASB

Appoint and fund ------| | |

Financial Accounting Foundation

Govern

Board of Trustees

Appoint Electors

Appoint and fund Financial Accounting Standards Board (5 members)

Financial Accounting Standards Advisory Committee (approx. 20 members)

Appoint

Task Forces of the Standards Board

Admin. Staff

Research Staff

FASB

Sarbanes-Oxley Section 108 Mission Types of pronouncements

Statements of Financial Accounting Concepts Statements of Financial Accounting Standards Interpretations Technical Bulletins

FASB Accounting Standards Codification

July 1, 2009 Single source of GAAP Effective for interim & annual periods ending after September 15, 2009

FASB Accounting Standards Codification

Goals:

Simplicity Accurate representation of GAAP Up-to-date research Reduce research time Mitigate noncompliance risk Real-time updates Assist FASB

Expectation

FASB Accounting Standards Codification

July 1, 2009 No more SFAS Changes publicized through an ASU

Summarize key provisions Detailed amendments to FASB Codification Explain basis for decision

FASB

Emerging Issues Standards Overload Standard setting as a political process Economic Consequences

GAAP

Evolution of phrase:

Changed wording of auditors certificate brought about by meetings between NYSE and AIA The APBs definition The Auditing Standards Executive Committees definition

SAS 69: determining acceptance of a specific principle is difficult

No single reference

SFAS No. 162

2008 Hierarchy of GAAP

GAAP Hierarchy
LEVEL A: FASB Statements FASB Interpretations SEC Rules and Interpretive Releases Accounting Principles Board Opinions (unless amended) Account Research Bulletins (unless amended)

LEVEL B: FASB Technical Bulletins AICPA Industry Audit Guides that have been reviewed by the FASB

GAAP Hierarchy

LEVEL C: AcSEC Practice Bulletins that have been reviewed by the FASB Consensuses reached by the EITF

LEVEL D: AICPA Accounting Interpretations (no longer issued) FASB Implementation Guides Other widely recognized or prevalent accounting practices

SFAS No. 168

2009 Codification Hierarchy

Replaces 162

Rule 203

Ethics Must consider pronouncements as primary source of GAAP

THE ROLE OF ETHICS IN ACCOUNTING

The public accountant as a watchdog

Accounting in Crisis The Events of the Early 2000s

Enron and the Accounting Scandals

Accounting in Crisis The Events of the Early 2000s

1.

Two major changes in the accounting profession have taken place in the wake of the accounting scandals: Arthur Andersen

formerly one the Big 5 audit firms has gone out of business

2.

Sarbanes-Oxley Act
President Bush signed into law July 2002 imposes a number of corporate governance rules on publicly traded companies

International Accounting Standards

1.

The concept of harmonization The IASB The IASBs objectives:

To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance To work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements.

2.

41 Statements of Accounting Standards and 10 Statements of Financial Reporting Standards to date No enforcement authority

End of Chapter 1
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