Chapter 8 - Financial Accounting and Reporting Flashcards
(54 cards)
Global accounting standards are ____________-based while US accounting standards are _____________-based
Principles
Rules
IFRS Characteristics
Relevance
Materiality
Faithful Representation
Comparability
Verifiability
Timeliness
Understandability
Completeness
Relevance – value to decision makers
Materiality – must have significant impact on the financial position
Faithful representation – should represent the reported transactions
Comparability – allows analysis across other firms and prior periods
Verifiability – neutral and unbiased
Timeliness – presented to make sure decision makers can make decisions on time
Understandability – must be able to be comprehended
Completeness (Cost Constraint) – must be complete
SEC Regulation S-X
Outlines reporting requirements
Additional guidance comes from SEC decisions
SEC Regulation G
Implements SOX
Reconcile pro-forma financial information to financial statements
What created the PCAOB?
SOX
What is the SEC’s general philosophy regarding accounting standards?
Private sector retains the initiative for establishing and improving accounting standards
US GAAP Measurement Principle
Items are measured at historical cost
Some items are measured at fair value
US GAAP Revenue Recognition Principle
Revenue is recognized when the customer gains control of a good or service
US GAAP Expense Recognition Principle
Matching principle
US GAAP Full Disclosure Principle
Any information that may influence decision should be disclosed
Earnings Management
Take advantage of the latitude allowed in timing revenues and expenses to maximize revenue
Estimates must be consistent in application
Professional Service Firms primarily use which method of accounting?
Modified cash basis
Key Differences for IFRS vs. GAAP
(General)
IFRS does not allow LIFO
IFRS uses single step for asset write-downs instead of two; more likely to write-down items under IFRS
IFRS requires capitalization of development costs once certain qualifying criteria are met
US GAAP generally requires development costs to be expensed, except software which requires a set of criteria
Two areas where IFRS and GAAP have had more convergence recently?
Leases
Revenue recognition
One area where IFRS and GAAP still differ?
Derivatives and hedge accounting
What did the Staff of the SEC’s Office of the Chief Accountant note in its 2012 report as it relates to IFRS adoption?
Adopting IFRS as authoritative guidance in the US is not supported by the participants
Is the ability to generate revenues from assets and control costs something that can be determined from reviewing financial statements?
Yes
What is the board primarily concerned with when reviewing financial statements?
Assess performance
Set strategies
Reward employees
Who assesses financial statements for creditworthiness?
Customers and creditors
Overview of New Requirements from SOX
(review)
Disclose code of ethics applicable to senior financial officers in annual report (Form 8-K if there are changes or they waive the code)
Disclose in annual reports whether the audit committee has a financial expert
Establish and maintain adequate internal controls
Audit committee must pre-approve all audit and non-audit services provided by the external audit firm
Audit committee must also be briefed on accounting methods, including alternative approaches
SOX vs. Securities Acts of 1930s for Financial Statements
Securities Acts of 1930s required financial statements to be included
SOX required the statements to be audited
Who develops GAAS?
ASB – Auditing Standards Board
AICPA
Does an auditor’s opinion comment on the financial fitness of the entity?
No
Is the concept of materiality similar between US GAAS and ISA?
Yes
