FASB ASC TUTORIAL & SOLUTIONS MANUAL
ACCOUNTING THEORY AND ANALYSIS
14TH EDITION
CHAPTER NO. 01. THE DEVELOPMENT OF ACCOUNTING THEORY
Case l-1
a. 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 of
standard-setting activity.
b. The Codification is expected to improve accounting practice by:
1. Reducing the amount of time and effort required to solve an accounting research
issue
2. Mitigating the risk of noncompliance through improved usability of the literature
3. Provide accurate information with real-time updates as Accounting Standards
Updates are released
4. Assisting the FASB 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. Abstracts
b. Topic D.
3. Derivative Implementation Group (DIG) Issues
4. Accounting Principles Board (APB) Opinions
5. 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 guidance
c. Practice Bulletins (PB), including the Notices to Practitioners elevated to Practice
Bulletin status by Practice Bulletin 1
, d. Technical Inquiry Service (TIS)—only for Software Revenue Recognition
Additionally, in an effort to increase the utility of the FASB ASC for public companies,
relevant portions of authoritative content issued by the SEC and selected SEC staff
interpretations and administrative 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)
4. SEC Staff guidance in:
i. Staff Accounting Bulletins (SAB)
ii. EITF Topic D and SEC Staff Observer comments
d. The FASB ASC contains all current authoritative accounting literature. However, if the
guidance for a particular transaction or event is not specified within it, the first source to
consider is accounting principles for similar transactions or events within a source of
authoritative GAAP. If no similar transactions are discovered, nonauthoritative guidance
from other sources may be considered. Accounting and financial reporting practices not
included in the Codification are nonauthoritative. Sources of nonauthoritative accounting
guidance and literature include, for example, the following:
1. Practices that are widely recognized and prevalent either generally or in the industry
2. FASB Concepts Statements
3. American Institute of Certified Public Accountants (AICPA) Issues Papers
4. International Financial Reporting Standards of the International Accounting
Standards Board Pronouncements of professional associations or regulatory agencies
5. Technical Information Service Inquiries and Replies included in AICPA Technical
Practice Aids
6. Accounting textbooks, handbooks, and articles
Case 1-2
a. Subsequent to its formation, the SEC began reviewing the registrations required by the
securities acts. Despite the absence of a body of well-established accounting principles, the
SEC begin to challenge accounting practices they considered inaccurate or misleading and
a recurring issue emerged. Many companies were increasing assets to current or appraisal
value with commensurate increases in reserves or equity (surplus) accounts. Expenses that
should have been charged against earnings were then offset against those surplus accounts.
The SEC believed this practice was incorrect but the securities laws were disclosure laws.
It questioned whether a presentation it believed to be wrong could be accepted if fully
disclosed, particularly if the SEC had not previously stated that the practice was
incorrect. That is, at what point do accounting presentations that are not correct, though
disclosed, amount to violations of the security laws? Accounting Series Release No. 1 was
, issued in response to the appraisal value and other questionable accounting practices
prevalent at that time. It stated that opinions on accounting principles would be published
periodically for the purpose of contributing to the development of uniform standards and
practices on major accounting questions and specifically stated that losses properly
chargeable against income should not be charged against surplus.
b. At that time the SEC was engaged in an internal debate over whether it should develop
accounting standards. In 1938, it decided in Accounting Series Release No. 4 to allow
accounting principles to be set in the private sector. This release stated that reports filed
with the SEC must be prepared in accordance with accounting principles that have
“substantial authoritative support.” If financial statements were prepared in accordance
with principles for which there was no substantial authoritative support, the SEC would
presume that the statements were misleading or inaccurate, despite disclosures. If the SEC
differed with a registrant on an accounting practice, disclosure in lieu of correction would
be accepted only if there were substantial authoritative support for the registrant’s practice.
Case 1-3
a. Inclusion or omission of information that materially affects net income harms particular
stakeholders. Accountants must recognize that their decision to implement (or delay)
reporting requirements will have immediate consequences for some stakeholders.
b. Yes. Because the FASB standard results in a fairer presentation, it should be implemented
as soon as possible--regardless of its impact on net income.
c. The accountant's responsibility is to provide financial statements that present fairly the
financial condition of the company. By advocating early implementation, Hoger fulfills
this task.
d. Potential lenders and investors, who read the financial statement and rely on its fair
representation 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 implementation that lowers net income (and may lower the value of the stock).
Case 1-4
a. CAP. The Committee on Accounting Procedure, CAP, which was in existence from 1939
to 1959, was a natural outgrowth of AICPA (then AIA) committees, which were 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 the years thereafter. The authorization to issue pronouncements on matters of
accounting principles and procedures was based on the belief that the AICPA had the
responsibility to establish practices 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 specific
accounting problems and topics rather than to the development of generally accepted
accounting principles. 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 bulletin. The CAP did not have the authority to require
acceptance of the issued bulletins by the general 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, in 1964, that the Council of the AICPA
adopted recommendations that departures from effective CAP Bulletins should be
disclosed in financial statements or in audit reports of members of the AICPA. The demise
of the CAP could probably be traced by four distinct factors: (1) the narrow nature 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 CAP in prescribing adherence the procedures described by the
bulletins, and (4) the lack of any formal representation on the CAP of interest groups such
as corporate managers, governmental agencies, and security analysts.
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 responsibility 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
opinions 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 of procedure outside of the official pronouncements of the APB had substantial
authoritative support, the member had to disclose the departure from the official APB
opinion in the financial statements of the firm in question.
The membership of the committee comprising the APB was also extended to include
representation from industry, government, and academe. The opinions were also designed
to include minority dissents by members of the board. Exposure drafts of 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. Interest groups outside of the accounting profession
questioned the appropriateness and desirability of having the AICPA directly responsible
ACCOUNTING THEORY AND ANALYSIS
14TH EDITION
CHAPTER NO. 01. THE DEVELOPMENT OF ACCOUNTING THEORY
Case l-1
a. 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 of
standard-setting activity.
b. The Codification is expected to improve accounting practice by:
1. Reducing the amount of time and effort required to solve an accounting research
issue
2. Mitigating the risk of noncompliance through improved usability of the literature
3. Provide accurate information with real-time updates as Accounting Standards
Updates are released
4. Assisting the FASB 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. Abstracts
b. Topic D.
3. Derivative Implementation Group (DIG) Issues
4. Accounting Principles Board (APB) Opinions
5. 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 guidance
c. Practice Bulletins (PB), including the Notices to Practitioners elevated to Practice
Bulletin status by Practice Bulletin 1
, d. Technical Inquiry Service (TIS)—only for Software Revenue Recognition
Additionally, in an effort to increase the utility of the FASB ASC for public companies,
relevant portions of authoritative content issued by the SEC and selected SEC staff
interpretations and administrative 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)
4. SEC Staff guidance in:
i. Staff Accounting Bulletins (SAB)
ii. EITF Topic D and SEC Staff Observer comments
d. The FASB ASC contains all current authoritative accounting literature. However, if the
guidance for a particular transaction or event is not specified within it, the first source to
consider is accounting principles for similar transactions or events within a source of
authoritative GAAP. If no similar transactions are discovered, nonauthoritative guidance
from other sources may be considered. Accounting and financial reporting practices not
included in the Codification are nonauthoritative. Sources of nonauthoritative accounting
guidance and literature include, for example, the following:
1. Practices that are widely recognized and prevalent either generally or in the industry
2. FASB Concepts Statements
3. American Institute of Certified Public Accountants (AICPA) Issues Papers
4. International Financial Reporting Standards of the International Accounting
Standards Board Pronouncements of professional associations or regulatory agencies
5. Technical Information Service Inquiries and Replies included in AICPA Technical
Practice Aids
6. Accounting textbooks, handbooks, and articles
Case 1-2
a. Subsequent to its formation, the SEC began reviewing the registrations required by the
securities acts. Despite the absence of a body of well-established accounting principles, the
SEC begin to challenge accounting practices they considered inaccurate or misleading and
a recurring issue emerged. Many companies were increasing assets to current or appraisal
value with commensurate increases in reserves or equity (surplus) accounts. Expenses that
should have been charged against earnings were then offset against those surplus accounts.
The SEC believed this practice was incorrect but the securities laws were disclosure laws.
It questioned whether a presentation it believed to be wrong could be accepted if fully
disclosed, particularly if the SEC had not previously stated that the practice was
incorrect. That is, at what point do accounting presentations that are not correct, though
disclosed, amount to violations of the security laws? Accounting Series Release No. 1 was
, issued in response to the appraisal value and other questionable accounting practices
prevalent at that time. It stated that opinions on accounting principles would be published
periodically for the purpose of contributing to the development of uniform standards and
practices on major accounting questions and specifically stated that losses properly
chargeable against income should not be charged against surplus.
b. At that time the SEC was engaged in an internal debate over whether it should develop
accounting standards. In 1938, it decided in Accounting Series Release No. 4 to allow
accounting principles to be set in the private sector. This release stated that reports filed
with the SEC must be prepared in accordance with accounting principles that have
“substantial authoritative support.” If financial statements were prepared in accordance
with principles for which there was no substantial authoritative support, the SEC would
presume that the statements were misleading or inaccurate, despite disclosures. If the SEC
differed with a registrant on an accounting practice, disclosure in lieu of correction would
be accepted only if there were substantial authoritative support for the registrant’s practice.
Case 1-3
a. Inclusion or omission of information that materially affects net income harms particular
stakeholders. Accountants must recognize that their decision to implement (or delay)
reporting requirements will have immediate consequences for some stakeholders.
b. Yes. Because the FASB standard results in a fairer presentation, it should be implemented
as soon as possible--regardless of its impact on net income.
c. The accountant's responsibility is to provide financial statements that present fairly the
financial condition of the company. By advocating early implementation, Hoger fulfills
this task.
d. Potential lenders and investors, who read the financial statement and rely on its fair
representation 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 implementation that lowers net income (and may lower the value of the stock).
Case 1-4
a. CAP. The Committee on Accounting Procedure, CAP, which was in existence from 1939
to 1959, was a natural outgrowth of AICPA (then AIA) committees, which were 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 the years thereafter. The authorization to issue pronouncements on matters of
accounting principles and procedures was based on the belief that the AICPA had the
responsibility to establish practices 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 specific
accounting problems and topics rather than to the development of generally accepted
accounting principles. 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 bulletin. The CAP did not have the authority to require
acceptance of the issued bulletins by the general 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, in 1964, that the Council of the AICPA
adopted recommendations that departures from effective CAP Bulletins should be
disclosed in financial statements or in audit reports of members of the AICPA. The demise
of the CAP could probably be traced by four distinct factors: (1) the narrow nature 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 CAP in prescribing adherence the procedures described by the
bulletins, and (4) the lack of any formal representation on the CAP of interest groups such
as corporate managers, governmental agencies, and security analysts.
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 responsibility 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
opinions 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 of procedure outside of the official pronouncements of the APB had substantial
authoritative support, the member had to disclose the departure from the official APB
opinion in the financial statements of the firm in question.
The membership of the committee comprising the APB was also extended to include
representation from industry, government, and academe. The opinions were also designed
to include minority dissents by members of the board. Exposure drafts of 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. Interest groups outside of the accounting profession
questioned the appropriateness and desirability of having the AICPA directly responsible
