(Solution Manual) Intermediate Accounting

Kieso,Weygandt,Terry, 16

Business

Solution Manual

16th Edition

• $15.00 $50.00

---

Description

Solution Manual for Intermediate Accounting, The downloadable file consists of 1993 pages, and the total size of the file is 11.6 MB. Purchase now only for highly discounted price.

Author(s): Kieso, Weygandt, Terry

---

---

Study Note Preview

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 1-1 CHAPTER 1 Financial Accounting and Accounting Standards ASSIGNMENT CLASSIFICATION TABLE (By Topic) Topics Questions Cases 1. Subject matter of accounting. 1 4 2. Environment of accounting. 2, 3, 21 6, 7 3. Role of principles, objectives, standards, and accounting theory. 4, 5, 6, 7 1, 2, 3, 5 4. Historical development of GAAP. 8, 9, 10, 11 8 5. Authoritative pronouncements and rule- making bodies. 12, 13, 14, 15, 16, 17, 18, 19, 20 3, 9, 11, 12, 14 6. Role of pressure groups. 21, 22, 23, 24, 25, 26 10, 16, 17 7. Ethical issues. 28 13, 15 1-2 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) ASSIGNMENT CLASSIFICATION TABLE (By Learning Objective) Learning Objectives Questions Cases 1. Understand the financial reporting environment . 1, 2, 3, 4, 5, 6, 7 CA1-2, CA1-3, CA1-4, CA1-5, CA1-6, CA1-7, CA1-9 2. Identify the major policy-setting bodies and their role in the standard-setting process. 8, 9, 10, 11, 13, 14, 15, 16, 18, 19 CA1-1, CA1-2, CA1-3, CA1-7, CA1-8, CA1-9, CA1-10, CA1-11, CA1- 12, CA1-14 3. Explain the meaning of generally accepted accounting principles (GAAP) and the role of the codification for GAAP. 12, 14, 18, 19, 20, 21 CA1-2, CA1-3, CA1-7, CA1-8, CA1- 12 4. Describe major challenges in the financial reporting environment . 16, 17, 21, 22, 23, 24, 25, 26, 27 , 28 CA1-6, CA1-10, CA1- 11, CA1-13, CA1-15, CA1-16, CA1- 17 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 1-3 ASSIGNMENT CHARACTERISTICS TABLE Item Description Level of Difficulty Time (minutes) CA1-1 FASB and standard-setting. Simple 15–20 CA1-2 GAAP and standard-setting. Simple 15–20 CA1-3 Financial reporting and accounting standards. Simple 15–20 CA1-4 Financial accounting. Simple 15–20 CA1-5 Objective of financial reporting. Moderate 20–25 CA1-6 Accounting numbers and the environment. Simple 10–15 CA1-7 Need for GAAP. Simple 15–20 CA1-8 AICPA ’s role in rule-making. Simple 20–25 CA1-9 FASB role in rule-making. Simple 20–25 CA1-10 Politicization of GAAP. Complex 30–40 CA1-11 Models for setting GAAP. Simple 15–20 CA1-12 GAAP terminology. Moderate 30–40 CA1-13 Rule-making Issues. Complex 20–25 CA1-14 Securities and Exchange Commission. Moderate 30–40 CA1-15 Financial reporting pressures. Moderate 25–35 CA1-16 Economic consequences. Moderate 25–35 CA1-17 GAAP and economic consequences. Moderate 25–35 1-4 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) ANSWERS TO QUESTIONS 1. Financial accounting measures, classifies, and summari zes in report form those activities and that information which relate to the enterprise as a whol e for use by parties both internal and external to a business enterprise. Managerial accounting also measure s, classifies, and summarizes in report form enterprise activities, but the communication i s for the use of internal, managerial parties, and relates more to subsystems of the entity. Managerial ac counting is management decision oriented and directed more toward product line, division, and profit center reporting. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 2. Financial statements generally refer to the four basi c financial statements: balance sheet, income statement, statement of cash flows, and statement of changes in owners ’ or stockholders ’ equity. Financial reporting is a broader concept; it includes t he basic financial statements and any other means of communicating financial and economic data to interested external parties. Examples of financial reporting other than financial statements a re annual reports, prospectuses, reports filed with the government, news releases, management forecasts o r plans, and descriptions of an enterprise ’s social or environmental impact. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 3. If a company ’s financial performance is measured accurately, fairl y, and on a timely basis, the right managers and companies are able to attract investment capital. To provide unreliable and irrelevant information leads to poor capital allocation which a dversely affects the securities market. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA F C: Reporting, AICPA PC: Communication 4. The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equit y investors, lenders, and other creditors in decisions about providing resources to the entity through equity i nvestments and loans or other forms of credit. Information that is decision-useful to capital providers (investors) may also be usefu l to other users of financial reporting who are not investors. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Rep orting, AICPA PC:: None 5. Investors are interested in financial reporting because it provides information that is useful for making decisions (referred to as the decision-usefulness approach). When making these decisions, investors are interested in assessing the company ’s (1) ability to generate net cash inflows and (2) management ’s ability to protect and enhance the capital providers ’ investments. Financial reporting should therefore help investors assess the amounts, timing, and uncertai nty of prospective cash inflows from dividends or interest, and the proceeds from the sale, redemption, or maturity of securities or loans. In order for investors to make these assessments, the econom ic resources of an enterprise, the claims to those resources, and the changes in them m ust be understood. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA F C: Reporting, AICPA PC: Communication 6. A common set of standards applied by all businesses and entities provides financial st atements which are reasonably comparable. Without a common set of standards, each enterprise could, and would, develop its own theory structure and set of practices, resulting in nonco mparability among enterprises. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 7. Gener al-purpose financial statements are not likely to satisfy the specific needs of all interested parties. Since the needs of interested parties such as creditors, managers, owners, g overnmental agencies, and financial analysts vary considerably, it is unlikely that one set of financial statements is equally appropriate for these varied uses. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 1-5 Questions Chapter 1 (Continued) 8. The SEC has the power to prescribe, in whatever detail it desires, the accounting practices and principles to be employed by the companies that fall wi thin its jurisdiction. Because the SEC receives audited financial statements from nearly all compani es that issue securities to the public or are listed on the stock exchanges, it is greatly interested in th e content, accuracy, and credibility of the statements. For many years the SEC relied on the AICPA to regulate the profession and develop and enforce accounting principles. Lately, the SEC ha s assumed a more active role in the develop- ment of accounting standards, especially in the area of disclosure requirements. In December 1973, in ASR No. 150, the SEC said the FASB ’s statements would be presumed to carry substantial authoritative support and anything contrary to them to lack such support. It thereby supports the development of accounting principles in the private s ector. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA F C: Reporting, AICPA PC: Communication 9. The Committee on Accounting Procedure was a special c ommittee of the American Institute of CPAs that, between the years of 1939 and 1959, issued 51 Accounting Research Bulletins dealing with a wide variety of timely accounting problems. These b ulletins provided solutions to immediate problems and narrowed the range of alternative practic es. But, the Committee ’s problem- by-problem approach failed to provide a well-defined and well-st ructured body of accounting theory that was so badly needed. The Committee on Accounting Procedure wa s replaced in 1959 by the Accounting Principles Board. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 10. The creation of the Accounting Principles Board was intended to advance the writt en expression of accounting principles, to determine appropriate practices, and to narrow the differences and inconsistencies in practice. To achieve its basic objectives, its mission was to develop an overall conceptual framework to assist in the resolution of problems as they became evident and to do substantive research on individual issues before pronouncements were issued. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA F C: Reporting, AICPA PC: Communication 11. Accounting Research Bulletins were pronouncements on accounting practice issued by the Committee on Accounting Procedure between 1939 and 1959; since 1964 they have been recognized as accepted accounting practice unless superseded in part or in whole by an opinion of the APB or an FASB standard. APB Opinions were issued by the Accounting Principles Board during the years 1959 through 1973 and, unless superseded by FASB Statements, are recogni zed as accepted practice and constitute the requirements to be followed by all business enterprises. Accounting Standards Updates are pronouncements of the Financial Accounting Standard s Board that are incorporated into the FASB codification and therefore represent the accounting profession ’s authoritative pronouncements on financial accounting and reporting practices. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting , AICPA PC: Communication 12. The explanation should note that generally accepted accounting principles or standards have “substantial authoritative support. ” They consist of accounting practices, procedures, theories, concepts, and methods which are recognized by a large majority of practicing accountant s as well as other members of the business and financial community. Bulletins issued by the Commit tee on Accounting Procedure, opinions rendered by the Accounting Principles Board, and statements issued by the Financial Accounting Standards Board constitute “substantial authoritative support. ” LO: 3, Bloom: K, Difficulty: Simple, 5-10, AACSB: Communication, AICPA BB: None, AICPA F C: Reporting, AICPA PC: Communication 13. It was believed that FASB Pronouncements would carry greate r weight than APB Opinions because of significant differences between the FASB and the AP B, namely: (1) t he FASB has a smaller mem- bership, (2) full-time compensated members; (3) the FASB has greater autonomy, (4) increased independence; (5) the FASB has broader representati on than the APB. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 1-6 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) Questions Chapter 1 (Continued) 14. The technical staff of the FASB conducts research on an identified accounting t opic and prepares a “preliminary views ” that is released by the Board for public reaction. The Board analyzes and evaluates the public response to the preliminary views, deliberates on the issues, an d issues an “exposure draft ” for public comment. The preliminary views merely p resent all facts and alternatives related to a specific topic or problem, whereas the exposure draft is a tentative “statement. ” After studying the public ’s reaction to the exposure draft, the Board may reevaluate its position, rev ise the draft, and vote on the issuance of a final statement. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 15. Statements of financial accounting standards contained in Accounting Standards updates constitute generally accepted accounting principles and dictate acceptable financial accounti ng and reporting practices as promulgated by the FASB. The first standards state ment was issued by the FASB in 1973. Statements of financial accounting concepts do not establish generally accepted accounting principles. Rather, the concepts statements set forth fundamental objectives and concepts tha t the FASB intends to use as a basis for developing future standards. The concepts serve as guidel ines in solving existing and emerging accounting problems in a consistent, sound manner. Both the standards statements and the concepts statements may develop through the same process from discussion memorandum, to exposure draft, to a final approved statement. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 16. Rule 203 of the Code of Professional Conduct prohibits a member of the AICPA from expressing an opinion that financial statements conform with GAAP if those statement s contain a material departure from an accounting principle promulgated by the FASB, or its predecessors, t he APB and the CAP, unless the member can demonstrate that because of unusual circumstances t he financial statements would otherwise have been misleading. Failure to follow Rule 203 can lead to a loss of a CPA ’s license to practice. This rule is extremely important because it requires aud itors to follow FASB standards. LO: 2, 4, Bloom: K, Difficulty: Simple, Time: 5-7, AACSB: Communication, AICPA BB: None, AICPA F C: Reporting, AICPA PC: Communication 17. The chairman of the FASB was indicating that too much attention is put on the bottom line and not enough on the development of quality products. Managers should be less concerned with short- term results and be more concerned with the long-term results. In addition , short-term tax benefits often lead to long-term problems. The second part of his comment relates to accountants being overly concerned with following a set of rules, so that if litigation ensues, they will be able to argue that the y followed the rules exactly. The problem with this approach is that accountants want more and more rules with less reliance on professional judgment. Less professional judgment leads to inappropriate use of acco unting procedures in difficult situations. In the accountants ’ defense, recent legal decisions have imposed vast new l iability on accountants . The concept of accountant ’s liability that has emerged in these cases is broad and expansive; the number of classes of people to whom the accountant i s held responsible are almost limitless. LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 1-7 Questions Chapter 1 (Continued) 18. The Emerging Issues Task Force often arrives at consensu s conclusions on certain financial report- ing issues. These consensus conclusions are then looke d upon as GAAP by practitioners because the SEC has indicated that it will view consensus solut ions as preferred accounting and will require persuasive justification for departing from them. T hus, at least for public companies which are sub- ject to SEC oversight, consensus solutions developed by th e Emerging Issues Task Force are followed unless subsequently overturned by the FASB. I t should be noted that the FASB took greater direct ownership of GAAP established by the EITF by requiring that consensus positions be ratified by the FASB. LO: 3, Bloom: K, Difficulty: Simple, Time: 5-7, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 19. The Financial Accounting Standards Board Accounting Sta ndards Codification (Codification) is a compilation of all GAAP in one place. Its purpose is to integrate and synthesize existing GAAP and not to create new GAAP. It creates one level of GAAP which is considered authoritative. The FASB Codification Research Systems (CRS) is an- on-line real time data base which provides easy access to the Codification. The Codification and the related CRS provide a topically organized structure which is subdivided into topic, subtopics, sections, and paragraphs. LO: 3, Bloom: K, Difficulty: Moderate, Time: 5-7, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 20. Hopefully, the codification will help users to bet ter understand what GAAP is. If this occurs, companies will be more likely to comply with GAAP and the time to research accounting issues will be substantially reduced. In addition, through the e lectronic web-based format, GAAP can be easily updated which will help users stay current. LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA F C: Reporting, AICPA PC: Communication 21. The sources of pressure are innumerable, but the most intense and continuous pressure to change or influence accounting principles or standards come from individual companies, industry associations, governmental agencies, practicing accountants, academicians, professional accoun- ting organizations, and public opinion. LO: 3, Bloom: K, Difficulty: Simple, 5-10, AACSB: Communication, AICPA BB: None, AICPA F C: Reporting, AICPA PC: Communication 22. Economic consequences means the impact of accounting reports on th e wealth positions of issuers and users of financial information and the decision-making behavior resulti ng from that impact. In other words, accounting information impacts various users in many different way s which leads to wealth transfers among these various groups. If politics plays an important role in the development of accounting rules, the rules will be subject to manipulation for the purpose of furthering whatever policy prevails at the moment . No matter how well intentioned the rule maker may be, if information is designed t o indicate that investing in a particular enterprise involves less risk than it actually does, or is designed to encourage invest- ment in a particular segment of the economy, financial reporting will suffer an irreplaceable loss of credibility. LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 23. No one particular proposal is expected in answer to t his question. The students ’ proposals, however, should be defensible relative to the following criter ia: (1) The method must be efficient, responsive, and expeditious. (2) The method must be free of bias and be above or insulated from pressure groups. (3) The method must command widespread support if it does not have legislative authority . (4) The method must produce sound yet practical accounting principles or standards. The students ’ proposals might take the form of alterations of the existing methodology, an accoun- ting court (as proposed by Leonard Spacek), or governmental device. LO: 4, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 1-8 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) Questions Chapter 1 (Continued) 24. Concern exists about fraudulent financial reporting because it can undermine the entire financial reporting process. Failure to provide information to users that is accurate can lead to ina ppropriate allocations of resources in our economy. In addition, failure to detect massive f raud can lead to additional governmental oversight of the accounting profession. LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 25. The expectations gap is the difference between what people think accountants should be doing and what accountants think they can do. It is a difficu lt gap to close. The accounting profession recognizes it must play an important role in narrowing this gap . To meet the needs of society, the profession is continuing its efforts in developing accounting standa rds, such as numerous pronouncements issued by the FASB, to serve as guidelines for recording and processing business transactions in the changing economic environment. LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 26. The following are some of the key provisions of the Sarbanes-Oxley Act:  Establishes an oversight board for accounting practice s. The Public Company Accounting Over- sight Board (PCAOB) has oversight and enforcement auth ority and establishes auditing, quality control, and independence standards and rules.  Implements stronger independence rules for auditors. Audit partners, for example, are required to rotate every five years and auditors are prohibited from offering certain types of consulting services to corporate clients.  Requires CEOs and CFOs to personally certify that financial statements and di sclosures are accurate and complete and requires CEOs and CFOs to forfeit bonuses and profits when there is an accounting restatement.  Requires audit committees to be comprised of independent members and members wi th finan- cial expertise.  Requires codes of ethics for senior financial officers. In addition, Section 404 of the Sarbanes-Oxley Act requires public companies to attest to the effectiveness of their internal controls over financial reporting. LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA F C: Reporting, AICPA PC: Communication 27. Some major challenges facing the accounting profession relate to the following items: Nonfinancial measurement —how to report significant key performance measurements such as customer satisfaction indexes, backlog information and reject rates on goods purchased. Forward-looking information —how to report more future oriented information. Soft assets —how to report on intangible assets, such as market know -how, market dominance, and well- trained employees. Timeliness —how to report more real-time information. LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 28. Accountants must perceive the moral dimensions of some situations because GAAP does not define or cover all specific features that are to be reported in financial statements. In these instances accountants must choose among alternatives. These accounting choices influence whether par - ticular stakeholders may be harmed or benefited. Moral decision-making invol ves awareness of potential harm or benefit and taking responsibility for the choices. LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Ethics, Communication, AICPA BB: Profe ssional Demeanor, AICPA FC: Reporting, AICPA PC: Communication Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 1-9 TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS CA 1-1 (Time 15 –20 minutes) Purpose —to provide the student with an opportunity to answer questions about FASB and stand ard setting. CA 1-2 (Time 15 –20 minutes) Purpose —to provide the student with an opportunity to answer questions about GAAP and standa rd setting. CA 1-3 (Time 15 –20 minutes) Purpose —to provide the student with an opportunity to answer questions about financial reporting and accounting standards topics. CA 1-4 (Time 15 –20 minutes) Purpose —to provide the student with an opportunity to distinguish between financial accounting and managerial accounting, identify major financial statements, and differentiate financi al statements and financial reporting. CA 1-5 (Time 20 –25 minutes) Purpose —to provide the student with an opportunity to explain the basic objective of financial reporting. CA 1-6 (Time 10 –15 minutes) Purpose —to provide the student with an opportunity to describe how reported accountin g numbers might affect an individual ’s perceptions and actions. CA 1-7 (Time 15 –20 minutes) Purpose —to provide the student with an opportunity to evaluate the viewpoint of remov ing mandatory accounting rules and allowing each company to voluntarily disclose the information it desired. CA 1-8 (Time 20 –25 minutes) Purpose —to provide the student with an opportunity to explain the evolution of account ing rule-making organizations and the role of the AICPA in the rule making environment. CA 1-9 (Time 20 –25 minutes) Purpose —to provide the student with an opportunity to identify the sponsoring organ ization of the FASB, the method by which the FASB arrives at a decision, and the types and the purposes of docu- ments issued by the FASB. CA 1- 10 (Time 30 –40 minutes) Purpose —to provide the student with an opportunity to focus on the types of organizations involved in the rule making process, what impact accounting has on the environment, and t he environment ’s influence on accounting. CA 1- 11 (Time 15 –20 minutes) Purpose —to provide the student with an opportunity to focus on what type of rule- making environment exists in the United States. In addition, this CA explores why user groups are interested in the nature of GAAP and why some groups wish to issue their own rules. CA 1- 12 (Time 30 –40 minutes) Purpose —to provide the student with an opportunity to identify and define acronyms appe aring in the first chapter. Some are self-evident, others are not so. 1-10 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) Time and Purpose of Concepts for Analysis (Continued) CA 1-13 (Time 20 –25 minutes) Purpose —to provide the student with an opportunity to consider t he ethical dimensions of implementation of a new accounting pronouncement. CA 1-14 (Time 30 –40 minutes) Purpose —to provide the student with an assignment that explores the role and function of the Securities and Exchange Commission. CA 1-15 (Time 25 –35 minutes) Purpose —to provide the student with a writing assignment concerning the ethical issues relate d to meeting earnings targets. CA 1-16 (Time 25 –35 minutes) Purpose —to provide the student with the opportunity to discuss the role of Congress in accounting rule- making. CA 1- 17 (Time 25 –35 minutes) Purpose —to provide the student with an opportunity to comment on a letter sent by busi ness execu- tives to the FASB and Congress on the accounting for derivatives. Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 1- 11 SOLUTIONS TO CONCEPTS FOR ANALYSIS CA 1-1 1. True 2. False. Any company claiming compliance with GAAP must comply with all standards and interpretations, including disclosure requirements. 3. True 4. False. In establishing financial accounting standards, the FASB relies on two basic premises : (1) the FASB should be responsive to the needs and viewpoints of the entire econom ic community, not just the public accounting profession, and (2) it should operate in full view of the public through a “due process ” system that gives interested people ample opportunities to make their view known. LO: 2, Bloom: K, Difficulty: Simple, Time: 15-20, AACSB: AICPA BB: None, AICPA BB: None, AICP A FC: Reporting, AICPA PC: None CA 1-2 1. False. In addition to providing decision-useful information about future c ash flows, management also is accountable to investors for the custody and safekeeping of the company ’s economic resources and for their efficient and profitable use; however, this is not con sidered an objective. 2. False. The objective of financial reporting is to provide financial informa tion about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers. 3. False. The FASB follows the same due process procedures for interpretations and standards. 4. True LO: 1, 2, Bloom: K, Difficulty: Simple, Time: 15-20, AACSB: AICPA BB: None, AICPA BB: None, AICP A FC: Reporting, AICPA PC: None CA 1-3 1. (d) 2. (d) 3. (d) 4. (a) 5. (a) 6. (b) 7. (d) 8. (b) LO: 1, 2, 3, Bloom: K, Difficulty: Simple, Time: 15-20, AACSB: AICPA BB: None, AICPA BB: None, AICP A FC: Reporting, AICPA PC: None CA 1-4 (a) Financial accounting is the process that culminates in the preparation of financial reports relative to the enterprise as a whole for use by parties both in ternal and external to the enterprise. In contrast, managerial accounting is the process of identification , measurement, accumulation, analysis, prepa- ration, interpretation, and communication of financia l information used by the management to plan, evaluate, and control within an organization and to assu re appropriate use of, and accountability for, its resources. 1-12 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) CA 1-4 (Continued) (b) The financial statements most frequently provided are the balance sheet, the income st atement, the statement of cash flows, and the statement of changes in owners ’ or stockholders ’ equity. (c) Financial statements are the principal means throu gh which financial information is communicated to those outside an enterprise. As indicated in (b), there are four major financial statements. However, some financial information is better provided, or can be provided only, by means of financial reporting other than formal financial statements. Fin ancial reporting (other than financial statements and related notes) may take various forms. Examples in clude the company president ’s letter or supplementary schedules in the corporate annual reports, prospectuses, reports filed with govern- ment agencies, news releases, management ’s forecasts, and descriptions of an enterprise ’s social or environmental impact. LO: 1, Bloom: K, Difficulty: Simple, Time: 15-20, AACSB: Communication, AICPA BB: None, AI CPA FC: Reporting, AICPA PC: Communication CA 1-5 (a) In accordance with Statement of Financial Accounting Concepts No. 1, “Objectives of Financial Reporting by Business Enterprises, ” the objectives of financial reporting are to provide inf ormation to investors, creditors, and others 1. that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. The information should be comprehensible t o those who have a reasonable understanding of business and economic activities and are willing to study the information with reasonable diligence. 2. to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securitie s or loans. Since investors ’ and creditors ’ cash flows are related to enterprise cash flows, financial reporting should provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise. 3. about the economic resources of an enterprise, the c laims to those resources (obligations of the enterprise to transfer resources to other entities and owners ’ equity), and the effects of trans- actions, events, and circumstances that change its re sources and claims to those resources. (b) Statement of Financial Accounting Concepts No. 1 established standards to meet the information needs of large groups of external users such as investors, creditors, and their rep resentatives. Although the level of sophistication related to business and financial accounting matters varies both within and between these user groups, users are expect ed to possess a reasonable understanding of accounting concepts, financial statements, and b usiness and economic activities and are expected to be willing to study and interpret the information with reasonable diligence. LO: 1, Bloom: K, Difficulty: Moderate, Time: 20-25, AACSB: Communication, AICPA BB: None , AICPA FC: Reporting, AICPA PC: Communication Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 1- 13 CA 1-6 Accounting numbers affect investing decisions. Investors, for example, use the financial statements of different companies to enhance their understanding of each company ’s financial strength and operating results. Because these statements follow generally accepted accounting principles, investors can ma ke meaningful comparisons of different financial statements to assist their investment decisions. Accounting numbers also influence creditors ’ decisions. A commercial bank usually looks into a company ’s financial statements and past credit history before deciding whether to grant a loan an d in what amount. The financial statements provide a fair picture of the company ’s financial strength (for example, short-term liquidity and long-term solvency) and operating performance for the current period and over a period of time. The information is essential for the bank to ensure t hat the loan is safe and soun d. LO: 1, 4, Bloom: C, Difficulty: Simple, Time: 10-15, AACSB: Communication, AICPA BB: None, AICPA F C: Reporting, AICPA PC: Communication CA 1-7 It is not appropriate to abandon mandatory accountin g rules and allow each company to voluntarily disclose the type of information it considers importa nt. Without a coherent body of accounting theory and standards, each accountant or enterprise would have t o develop its own theory structure and set of practices, and readers of financial statements would have to familiarize themselves with every company ’s peculiar accounting and reporting practices. As a res ult, it would be almost impossible to prepare state- ments that could be compared. In addition, voluntary disclosure may not be an efficient way of disseminating inform ation. A company is likely to disclose less information if it has the discretion to do so. Thus, the company can reduce its cost of assembling and disseminating information. However, an investor wishing a dditional information has to pay to receive additional information desired. Different investors may be i nterested in different types of information. Since the company may not be equipped to provide the reques ted information, it would have to spend additional resources to fulfill such needs; or the company may refuse to furni sh such information if it ’s too costly to do so. As a result, investors may not get the desired information o r they may have to pay a significant amount of money for it. Furthermore, redundancy in gathering and distributing information occurs when different investors ask for the same informat ion at different points in time. To the society as a whole, this would not be an efficient way of util izing resources. LO: 1, 2, 3, Bloom: AN, Difficulty: Simple, Time: 15-20, AACSB: Reflective Thinking, Communication, AICP A BB: None, AICPA FC: Reporting, AICPA PC: Communication CA 1-8 (a) One of the committees that the AICPA established prior to the establishment of the FASB was the Committee on Accounting Procedures (CAP). The CAP, during its existence f rom 1939 to 1959, issued 51 Accounting Research Bulletins (ARB). In 1959, the AICPA created the Accounti ng Prin- ciples Board (APB) to replace the CAP. Before being replaced by the FA SB, the APB released 31 official pronouncements, called APB Opinions. (b) Although the ARBs issued by the CAP helped to narrow the range of al ternative practices to some extent, the CAP ’s problem- by-problem approach failed to provide the well-defined, structured body of accounting principles that was both needed and desired. As a result, the CA P was replaced by the APB. 1-14 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) CA 1-8 (Continued) The APB had more authority and responsibility than did the CAP. Unfortunately, the APB was beleaguered throughout its 14-year existence. It came under fire early, charged with lack of produc- tivity and failing to act promptly to correct alleged accounting abuses. The APB also met a lot of industry and CPA firm opposition and occasional govern mental interference when tackling numerous thorny accounting issues. In fear of governmental r ule making, the accounting profession investigated the ineffectiveness of the APB and replaced it with the FASB. Learning from prior experiences, the FASB has several s ignificant differences from the APB. The FASB has: (1) smaller membership, (2) full-time, co mpensated membership, (3) greater autonomy, (4) increased independence, and (5) broader representation. In addition, the FAS B has its own research staff and relies on the expertise of various tas k force groups formed for various projects. These features form the bases for the expectations of success and support from the public. In addition, the due process taken by the FASB in establi shing financial accounting standards gives interested persons ample opportunity to make their v iews known. Thus, the FASB is responsive to the needs and viewpoints of the entire economic com munity, not just the public accounting profession. (c) The AICPA has supplemented the FASB ’s efforts in the present standard-setting environment. The issue papers, which are prepared by the Financial R eporting Executive Committee (FinREC) formally the Accounting Standards Executive Committee (AcSEC ), identify current financial reporting problems for specific industries and present alternative treatments of the issue. These pape rs provide the FASB with an early warning device to insure timely issuance of FAS B standards. In situations where the FASB avoids the subject of an issue paper , FinR EC may issue a Statement of Position to provide guidance for the reporting issue. FinR EC also issues Practice Bulletins which indicate how the AICPA believes a given transaction should be reported. Recently, the role of the AICPA in standard-setting has diminished. Th e FASB and the AICPA agreed, that after a transition period, the AICPA and FinR EC no longer issues authoritative accounting guidance for public companies. LO: 2, Bloom: K, Difficulty: Simple, Time: 20-25, AACSB: Communication, AICPA BB: None, AI CPA FC: Reporting, AICPA PC: Communication CA 1-9 (a) The Financial Accounting Foundation (FAF) is the sponsoring organization of the FASB. The FAF selects the members of the FASB and its Advisory Council, funds their activities, and g enerally oversees the FASB ’s activities. The FASB follows a due process in establishing a typical FASB Statement of Financial Accounting Standards. The following steps are usually taken: (1) A topic or project is identified and placed on the Board ’s agenda. (2) A task force of experts from various se ctors is assembled to define problems, issues, and alternatives related to the top ic. (3) Research and analysis are conducted by the FASB technical staff. (4) A preliminary views docu ment is drafted and released. (5) A public hearing is often held, usually 60 days after the rele ase of the preliminary views. (6) The Board analyzes and evaluates the public response. (7) The Boar d deliberates on the issues and prepares an exposure draft for release. (8) After a 30-day ( minimum) exposure period for public comment, the Board evaluates all of the responses received. (9) A committee studies the exposure draft in relation to the public responses, reevaluates its position, a nd revises the draft if necessary. (10) The full Board gives the revised draft final consideration and v otes on issuance of a Standards Statement. The passage of a new accounting standard in the form of a n FASB Statement requires the support of five of the seven Board members, before it is inc orporated in the codification. (b) The FASB issues two major types of pronouncement s: Accounting Standards Updates (ASUs) and Concepts Statements . ASUs issued by the FASB are considered GAAP. Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 1- 15 CA 1-9 (Continued) ASU ’s may be comprised of major standards projects, EITF consensus, or interpretations. Regardless of nature, if approved by the FASB in a A SU, then the guidance is considered GAAP. The Statements of Financial Accounting Concepts (SFAC) help the FASB to avoid t he “problem- by-problem approach. ” These statements set forth fundamental objectives and concepts that the Board will use in developing future standards of financial accounting and report ing. They are intended to form a cohesive set of interrelated concepts, a body of theory or a conceptual framework, that will serve as tools for solving existing and emerging problems in a consistent, sound manner. In addition, the FASB ’s Emerging Issues Task Force (EITF) issues statements to provide guidance on how to account for new and unusual financial transa ctions that have the potential for creating diversity in reporting practices. The EITF identifies c ontroversial accounting problems as they arise and determines whether they can be quickly resolved or whether the FASB should become involved in solving them. In essence, it becomes a “problem filter ” for the FASB. Thus, it is hoped that the FASB will be able to work on more pervasive long-term p roblems, while the EITF deals with short- term emerging issues. LO: 2, Bloom: K, Difficulty: Simple, Time: 20-25, AACSB: Communication, AICPA BB: None, AI CPA FC: Reporting, AICPA PC: Communication CA 1- 10 (a) CAP. The Committee on Accounting Procedure, CAP, which wa s in existence from 1939 to 1959, was a natural outgrowth of AICPA committees which we re in existence during the period 1933 to 1938. The committee was formed in direct response to the criticism received by the accounting profession during the financial crisis of 1929 and th e years thereafter. The authorization to issue pronouncements on matters of accounting principles a nd procedures was based on the belief that the AICPA had the responsibility to establish practice s that would become generally accepted by the profession and by corporate management. As a general rule, the CAP directed its attention, almost entirely, to resolving spe cific accounting problems and topics rather than to the development of generally accepted accounting principl es. The committee voted on the acceptance of specific Accounting Research Bulletins published by the committee. A two-thirds majority was required to issue a particular research bul letin. The CAP did not have the authority to require acceptance of the issued bulletins by the g eneral membership of the AICPA, but rather received its authority only upon general acceptance of the pronouncement by the members. That is, the bulletins set forth normative accounting procedures that “should be ” followed by the accounting profession, but were not “required ” to be followed. It was not until well after the demise of the CAP, i n 1964, that the Council of the AICPA adopted recommendations that departures from effective CAP B ulletins should be disclosed in financial statements or in audit reports of members of the AICP A. The demise of the CAP could probably be traced to four distinct factors: (1) the narrow nat ure of the subjects covered by the bulletins issued by the CAP, (2) the lack of any theoretical groundwork in establishing the procedures presented in the bulletins, (3) the lack of any real authority by the C AP in prescribing adherence to the procedures described by the bulletins, and (4) the lack of any for mal representation on the CAP of interest groups such as corporate managers, governmental agencie s, and security analysts. 1-16 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) CA 1- 10 (Continued) APB. The objectives of the APB were formulated mainly to correct the deficiencies of the CAP as described above. The APB was thus charged with the res ponsibility of developing written expression of generally accepted accounting principles through consideration of the research done by other members of the AICPA in preparing Accounting Research Studies. The committee was in turn given substantial authoritative standing in that all op inions of the APB were to constitute substantial authoritative support for generally accepted accounting principles. If an individual member of the AICPA decided that a principle or procedure outside of the official pronouncements of the APB had substantial authoritative support, the member had to disclose the departure fr om the official APB opinion in the financial statements of the firm in question. The membership of the committee comprising the APB wa s also extended to include representation from industry, government, and academe. The opinions were also designed to include minori ty dissents by members of the board. Exposure drafts o f the proposed opinions were readily distributed. The demise of the APB occurred primarily because the purposes for which it was created were not being accomplished. Broad generally accepted accounting principles were not being developed. The research studies supposedly being undertaken in support of subsequent opinions to be expressed by the APB were often ignored. The committee in essence became a simple extension of the original CAP in that only very specific problem areas were being addressed. Inte rest groups outside of the accounting profession questioned the appropriateness and desirabi lity of having the AICPA directly responsible for the establishment of GAAP. Politicization o f the establishment of GAAP had become a reality because of the far-reaching effects involved in the questions being resolved. FASB. The formal organization of the FASB represents an a ttempt to vest the responsibility of establishing GAAP in an organization representing the d iverse interest groups affected by the use of GAAP. The FASB is independent of the AICPA. It is inde pendent, in fact, of any private or govern- mental organization. Individual CPAs, firms of CPAs, accounting educators, and representatives of private industry will now have an opportunity to make know n their views to the FASB through their membership on the Board. Independence is facilitate d through the funding of the organization and payment of the members of the Board. Full-time memb ers are paid by the organization and the organization itself is funded solely through contribut ions. Thus, no one interest group has a vested interest in the FASB. Conclusion. The evolution of the current FASB certainly does rep resent “increasing politicization of accounting standards setting. ” Many of the efforts extended by the AICPA can be directly attributed to the desire to satisfy the interests of many groups within our society. The FASB represents, perhaps, just another step in this evolutionary process. (b) Arguments for politicalization of the accounting rule-making process: 1. Accounting depends in large part on public confidence for its success. Consequentl y, the critical issues are not solely technical, so all those having a bona fide interest in the out put of accounting should have some influence on that output. 2. There are numerous conflicts between the various interest groups. In the face of this, compro- mise is necessary, particularly since the critical issues in accounting are value jud gments, not the type which are solvable, as we have traditionally assumed, using deterministic models. Only in this way (reasonable compromise) will the financial community have conf idence in the fairness and objectivity of accounting rule-making. 3. Over the years, accountants have been unable to establish, on the basis of technical accoun- ting elements, rules which would bring about the desired uniformity and acceptabili ty. This inability itself indicates rule-setting is primarily consensual in nature. Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 1- 17 CA 1- 10 (Continued) 4. The public accounting profession, through bodies such as the Accounting Principles Boar d, made rules which business enterprises and individuals “had ” to follow. For many 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 degree by those rules. It is only natural that they would try to influence or control the factors that deter mine their economic well-being. (c) Arguments against the politicalization of the accounting rule-making process: 1. Many accountants feel that accounting is primarily t echnical in nature. Consequently, they feel that substantive, basic research by objective, inde pendent and fair-minded researchers ultimately will result in the best solutions to critical issues, s uch as the concepts 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 are concerned, many feel that professional accountants, taking into account the diverse interests of the various groups using accounting information, are in the best p osition, because of their independence, education, training, and objectivity, to decide what generally accepted accounting principles ought to be. 3. The complex situations that arise in the business wo rld require that trained accountants develop the appropriate accounting principles. 4. The use of consensus to develop accounting principles would decrease the professional stat us of the accountant. 5. This approach would lead to “lobbying ” by various parties to influence the establishment of ac- counting principles. LO: 4, Bloom: E, Difficulty: Complex, Time: 30-40, AACSB: Analytic, Communication, Eth ics, AICPA BB: Professional Demeanor, AICPA FC: Reporting, AICPA PC: Communication CA 1- 11 (a) The public/private mixed approach appears to be the way rules are established in the United States. In many respects, the FASB is a quasi-governmental agenc y in that its pronouncements are required to be followed because the SEC has provided support for this approach. The SEC has the ultimate power to establish GAAP but has chosen to permit the private sector to develop these rules. By accepting the standards established by the FASB as aut horitative, it has granted much power to the FASB. (It might be useful to inform the students tha t not all countries follow this model. For example, the purely political approach is used in France and West Germany. The private, professional approach is employed in Australia, Canada, and the United Kin gdom). (b) Publicly reported accounting numbers influence the distribution of scarce resources. Resources are channeled where needed at returns commensurate with p erceived risk. Thus, reported accounting numbers have economic effects in that resources are transferred among entities and individuals as a consequence of these numbers. It is not surprising the n that individuals affected by these numbers will be extremely interested in any proposed changes i n the financial reporting environment. (c) The Accounting Standards Executive Committee (AcSEC of the AICPA), among other groups, has presented a potential challenge to the exclusive right of the FASB to establish accounting principles. Also, Congress has been attempting to legislate certain accounting practices, particularly to help struggling industries. Some possible reasons why other groups might wish to establish GAAP are: 1. As indicated in the previous answer, these rules have economic effects and therefore certain groups would prefer to make their own rules to ensure that they receive just treatm ent. 2. Some believe the FASB does not act quickly to resolve accounting matters, ei ther because it is not that interested in the subject area or because it lacks the resources to do so. 1-18 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) CA 1- 11 (Continued) 3. Some argue that the FASB does not have the competence to legislate GAAP in cert ain areas. For example, many have argued that the FASB should not legislate GAAP for not- for-profit enterprises because the problems are unique and not well known by the FASB. LO: 2, Bloom: C, Difficulty: Simple, Time: 15-20, AACSB: Communication, AICPA BB: None, A ICPA FC: Reporting, AICPA PC: Communication CA 1- 12 (a) AICPA. American Institute of Certified Public Accountants. The national organization of practicing certified public accountants. (b) CAP. Committee on Accounting Procedure. A committee of practicin g CPAs which issued 51 Accounting Research Bulletins between 1939 and 1959 and is a predecessor of the FASB. (c) EITF. Emerging Issues Task Force. Provides implementation guidance to reduce diversity in practice in a timely basis. To become GAAP, EITF consensues must be approved by the FASB. (d) APB. Accounting Principles Board. A committee of public accountants, industry accountants and academicians which issued 31 Opinions between 1959 and 1973. The APB replaced the CAP and was itself replaced by the FASB. Its opinions, unless superseded, remain a primary source of GAAP. (e) FAF. Financial Accounting Foundation. An organization whose purpose is to select members of the FASB and its Advisory Councils, fund their activities, and exercise general oversight . (f) FASAC. Financial Accounting Standards Advisory Council. An organization whose purpose is to consult with the FASB on issues, project priorities, and select task forces. (g) GAAP. Generally accepted accounting principles. A common set of standards, principles, and procedures which have substantial authoritative support and have been accepted as appropriate because of universal application. (h) CPA. Certified public accountant. An accountant who has fulfilled certain education and experience requirements and passed a rigorous examination. Mos t CPAs offer auditing, tax, and management consulting services to the general public. (i) FASB. Financial Accounting Standards Board. The primary body which currently establishes and improves financial accounting and reporting standards for the guidance of issuers , auditors, users, and others. (j) SEC. Securities and Exchange Commission. An independent regulatory agency of the United States government which administers the Securities Acts of 1933 and 1934 and other acts. (k) IASB. International Accounting Standards Board. An intern ational group, formed in 1973, that is actively developing and issuing accounting standards that will have international appeal and hopefully support. LO: 3, Bloom: K, Difficulty: Moderate, Time: 30-40, AACSB: Communication, AICPA BB: None , AICPA FC: Reporting, AICPA PC: Communication Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 1- 19 CA 1-13 (a) Inclusion or omission of information that materia lly affects net income harms particular stakeholders . Accountants must recognize that their decision to im plement (or delay) reporting requirements will have immediate consequences for some stakeholders. (b) Yes. Because the FASB rule results in a fairer r epresentation, it should be implemented as soon as possible —regardless of its impact on net income. SEC Staff Bu lletin No. 74 (December 30, 1987) requires a statement as to what the expected impact o f the standard will be. (c) The accountant ’s responsibility is to provide financial statements that present fairly the financi al condition of the company. By advocating early implementation, Weller fulfil ls this task. (d) Potential lenders and investors, who read the financial statements and rely on their fair represen- tation of the financial condition of the company, have the most to gain by early implementation. A stockholder who is considering the sale of stock may be harmed by early i mplementation that lowers net income (and may lower the value of the stock). LO: 3, Bloom: K, Difficulty: Complex, Time: 20-25, AACSB: Communication, AICPA BB: None, AICP A FC: Reporting, AICPA PC: Communication CA 1-14 (a) The Securities and Exchange Commission (SEC) is an independent federal agency that receives its authority from federal legislation enacted by Congress. The Securities and Exchange Act of 1934 created the SEC. (b) As a result of the Securities and Exchange Act of 1934, the SEC has l egal authority relative to accounting practices. The U.S. Congress has given the SEC broad regulatory power t o control accounting principles and procedures in order to fulfill its goal of full and fair di sclosure. (c) There is no direct relationship as the SEC was cre ated by Congress and the Financial Accounting Standards Board (FASB) was created by the private se ctor. However, the SEC historically has followed a policy of relying on the private sector to establish financial accounting and reporting stan- dards known as generally accepted accounting principles (GAAP). The SEC does not necessarily agree with all of the pronouncements of the FASB. In cases of unresolved differences, the SEC rules take precedence over FASB rules for companies within SEC jurisdiction. LO: 2, Bloom: K, Difficulty: Moderate, Time: 30-40, AACSB: Communication, AICPA BB: AICP A BB: None, AICPA FC: Reporting, AICPA PC: Communication CA 1-15 (a) The ethical issue in this case relates to making questionable entries to meet expected earnings forecasts. As indicated in this chapter, businesses ’ concentration on “maximizing the bottom line, ” “facing the challenges of competition, ” and “stressing short-term results ” places accountants in an environment of conflict and pressure. (b) Given that Normand has pleaded guilty, he certainl y acted improperly. Doing the right thing, making the right decision, is not always easy. Right is not always obvious, and the pressures to “bend the rules, ” “to play the game, ” “to just ignore it ” can be considerable. (c) No doubt, Normand was in a difficult position. He was concerned that if he f ailed to go along, it would affect his job performance negatively or that he might be terminated. These job pressures, time pressures, peer pressures often lead individuals astray. Can it happen to you? O ne individual noted that at a seminar on ethics sponsored by the CMA Society of Southern California, attendees were asked if they had ever been pressured to make questionable entries. This individual not ed that to the best of his recollection, everybody raised a hand, and more than one had even tually chosen to resign. 1-20 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) CA 1- 15 (Continued) (d) Major stakeholders were: (1) Troy Normand, (2) present and potential stockholders and creditors of WorldCom, (3) employees, and (4) family. Recognize that WorldCom is t he largest bankruptcy in United States history, so many individuals are affected. LO: 4, Bloom: AN, Difficulty: Moderate, Time: 25-30, AACSB:Ethics, Analytic, Communication, A ICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication CA 1-16 (a) Considering the economic consequences of GAAP, it is not surprising that special interest groups become vocal and critical (some supporting, some opposi ng) when rules are being formulated. The FASB ’s derivative accounting pronouncement is no exception. Many from the banking industry, for example, criticized the rule as too complex and leadin g to unnecessary earnings volatility. They also indicated that the proposal may discourage prudent risk ma nagement activities and in some cases could present misleading financial information. As a result, Congress is often approached to put pre ssure on the FASB to change its rulings. In the stock option controversy, industry was quite effecti ve in going to Congress to force the FASB to change its conclusions. In the derivative controversy, Rep. Richard Baker introduced a bill which would force the SEC to formally approve each standard issued by the FASB. Not only would this process delay adoption, but could lead to additional pol iticalization of the rule-making process. Dingell commented that Congress should stay out of the rule-making process and defended the FASB ’s approach to establishing GAAP. (b) Attempting to set GAAP by a political process will probably lead to the follow ing consequences: (a) Too many alternatives. (b) Lack of clarity that will lead to inconsistent application. (c) Lack of disclosure that reduces transparency. (d) Not comprehensive in scope. Without an independent process, GAAP will be based on political compromise. A classic illustration is what happened in the savings and loan industry. Applying generally accepted accounting principles to the S&L industry would have forced regulators to restrict activit ies of many S&Ls. Unfortunately, accounting principles were overridden by regulatory rules and the resul ting lack of transparency masked the problems. William Siedman, former FDIC Chairman noted lat er that it was “the worst mistake in the history of government. ” Another indication of the problem of government intervention is shown in the accountin g standards used by some countries around the world. Completeness and transparency of information needed by investors and creditors is not available in order to meet or achieve other objectiv es. LO: 4, Bloom: C, Difficulty: Moderate, Time: 25-30, AACSB: Communication, AICPA BB: None , AICPA FC: Reporting, AICPA PC: Communication Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 1- 21 CA 1- 17 (a) The “due process ” system involves the following: 1. Identifying topics and placing them on the Board ’s agenda. 2. Research and analysis is conducted and preliminary views of pros and cons issued. 3. A public hearing is often held. 4. Board evaluates research and public responses and issues exposure draft. 5. Board evaluates responses and changes exposure draft, if necessary. Final statement is then issued. (b) Economic consequences mean the impact of accounting reports on the wealth posit ions of issuers and users of financial information and the decision-making behavior resulting from that impact. (c) Economic consequences indicated in the letter are: (1) concerns related to the potential impact on the capital markets, (2) the weakening of companies ’ ability to manage risk, and (3) the adverse control implications of implementing costly and complex new rules imposed at the same tim e as other major initiatives, including the Year 2000 issues and a single European currency. (d) The principal point of this letter is to delay the finalization of the derivatives standard. As indicated in the letter, the authors of this letter urge the FASB to expose its new proposal for publi c comment, following the established due process proc edures that are essential to acceptance of its standards and providing sufficient time for affecte d parties to understand and assess the new approach. (Authors note: The FASB indicated in a fo llow-up letter that all due process procedures had been followed and all affected parties had more tha n ample time to comment. In addition, the FASB issued a follow-up standard, which delayed the effe ctive date of the standard, in part to give companies more time to develop the information syst ems needed for implementation of the standard). (e) The reason why the letter was sent to Congress was to put additional pressure on the FASB to delay or drop the issuance of a rule on derivatives. Unfortunately, in too many cases, whe n the business community does not like the answer proposed by the FASB, it resorts to lobbying mem bers of Congress. The lobbying efforts usually involve developing some type of legislation that will negat e the rule. In some cases, efforts involve challenging the FASB ’s authority to develop rules in certain areas with additional Congressional oversight. LO: 4, Bloom: E, Difficulty: Moderate, Time: 25-30, AACSB: Communication, AICPA BB: None , AICPA FC: Reporting, AICPA PC: Communication 1-22 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) FINANCIAL REPORTING PROBLEM (a) The key organizations involved in rule making in t he U.S. are the AICPA , FASB, and SEC. See also (c). (b) Different authoritative literature pertaining to methods recording account- ing transactions exists today. Some authoritative li terature has received more support from the profession than other literat ure. The literature that has substantial authoritative support is the o ne most supported by the profession and should be followed when recor ding accounting transactions. These standards and procedures are ca lled generally accepted accounting principles (GAAP). With implementation of the Codification, what quali fies as authoritative is any literature contained in the Codification. The Codificati on changes the way GAAP is documented, presented, and updated. It creates one level of GAAP which is considered authoritative. All other accounting literature is considered non-authoritative. What happens if the Codification does not cover a certain type of trans- action or event? In this case, other accounting literature should be considered which includes FASB Concepts Statements, international financial reporting standards and other professional literature. (c) Rule-making in the U.S. has evolved through the work of the foll owing organizations: 1. American Institute of Certified Public Accountants (AICP A)—it is the national professional organization of practicing Certified Public Accountants (CPAs). Outgrowths of the AICPA have been the Com- mittee on Accounting Procedure (CAP) which issued Acco unting Research Bulletins and the Accounting Principles Bo ard (APB) whose major purposes were to advance written expression of accounting principles, determine appropriate practices, and narrow the areas of difference and inconsistency in practice. 2. Financial Accounting Standards Board (FASB) —the mission of the FASB is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, which includes issuers, auditors, and users of the financial information. Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 1- 23 FINANCIAL REPORTING PROBLEM (Continued) 3. Securities and Exchange Commission (SEC) —the SEC is an inde- pendent regulatory agency of the United States governme nt which administers the Securities Act of 1933, the Securities Exchange Act of 1934, and several other acts. The SEC has broad power to pre- scribe the accounting practices and standards to be employed by companies that fall within its jurisdiction. (d) The SEC and the AICPA have been the authority for compliance with GAAP. The SEC has indicated that financial statements conforming to standards set by the FASB will be presumed to have a uthoritative support . The AICPA, in Rule 203 of the Code of Professional E thics, requires that members prepare financial statements in accordance with GAAP. Failure to follow Rule 203 can lead to the loss of a CPA ’s license to practice. LO: 2, 3, Bloom: K, Difficulty: Simple, Time: 20-25, AACSB: Communicatio n, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication 1-24 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) SOLUTIONS TO CODIFICATION EXERCISES CE1-1 The information at this link describes the elements offered in The FASB Accou nting Standards Codification. As indicated, the website offers several resources to enhance your working knowl edge of the Codification and the Codification Research System. This page includes links to hel p pages which describe specific functions and features of the Codification. Links to frequently asked questions, the FASB Learning Guide, and the Notice to Constituents are also available on this page. Help pages FAQ Learning Guide About the Codification —Notice of Constituents LO: 3, Bloom: K, Difficulty: Simple, Time: 5-10, AACSB: Communication, Technology, AICPA B B: Technology, AICPA FC: Research, Reporting, Technology , AICPA PC: Communication CE1-2 The following information is provided at the Providing Feedback link: The Codification includes a feature which can be used to submit content-related feedback or general, system-related comments. The feedback system is not designed for comments on proposed Accounting Standards Updates. Content-related feedback As a registered user of the FASB Accounting Standards Codification Research System w ebsite, you are able and are encouraged to provide feedback, at the paragraph level, to the FASB about any content-related matters. For specific information about the Codification and t he feedback process, please read the Notice to Constituents. To provide content-related feedback: Click the Submit feedback button beneath the paragraph for which you want to provide feedback. Enter or copy/paste your comments in the text box. Note that formatting (lists, bo ld, etc.) is not retained and there is a 4,000 character limit on feedback submissions. Click SUBMIT. Your comments are sent to the FASB and reviewed by FASB staff. You can also submit multiple comments for any given paragraph, if, for example, you determine that more information would be useful to the FASB staff. General feedback Click here to provide general feedback on the Codification in general, the Codif ication Research System website, and other system-related items that are not content specific. LO: 3, Bloom: K, Difficulty: Simple, Time: 10-15, AACSB: Communication, Technology, A ICPA BB: Technology, AICPA FC: Research, Reporting, Technology, AICPA PC: Communication Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 1- 25 CE1-3 The “What ’s New ” page provides links to Codification content that has been recently issued. During the verification phase, updates may result from either the issuance of Codification updat e instructions that accompany new Standards or from changes to the Codification due to incorporation of constituent feedback. LO: 3, Bloom: K, Difficulty: Simple, Time: 5-10, AACSB: Communication, Technology, AICPA B B: Technology, AICPA FC: Research, Reporting, Technology, AICPA PC: Communication