CHAPTER 1
The Financial Reporting Environment
Solutions
Questions
Q1-
1aFinancialainformationaisaaamuchabroaderaconceptathanasimplyatheafinancialastatementsaandafootnot
esatoatheafinancialastatements.aFinancialainformationaincludesaitemsasuchaasatheaPresident‘saletteratoat
heaowners,amanagement‘sadiscussionaandaanalysis,atheaauditors‘areport,atheamanagementareportaand
apressareleases.aOfacourse,atheabasicafinancialastatementsaandafootnotesaareaincludedainatheatermafina
ncialainformation.aTheabasicafinancialastatementsaare:atheabalanceasheeta(alsoa referredatoaasatheastate
mentaofafinancialaposition),atheastatementaofacomprehensiveaincomea(alsoareferredatoaasatheastateme
ntaofanetaincomeaandatheastatementaofacomprehensiveaincome),atheastatementaofacashaflows,aandathea
statementaofashareholders‘aequity.aFinancialainformationaisanotasynonymousawithatheatermafinancial
astatementsabecauseatheafinancialastatementsaareaaasubsetaofatheadifferentatypesaofafinancialainformat
ionaprovided.
Q1-
2aTheapurposeaofageneratingafinancialastatementsaisatoaprovideausefulainformationatoausersatoaevalua
teaeconomicaentitiesaandamakeaefficientaresourceaallocationadecisionsabasedaonathearisksaandareturns
aofaaaparticularainvestment.aTheaFinancialaAccountingaStandardsaBoarda(FASB)aidentifiesainvestor
s,alendersaandaotheracreditorsaasatheaprimaryausersaofatheafinancialastatements.aTheafinancialastateme
ntsaareatheaculminationaofatheafinancialareportingaprocess.
Q1-
3aCapitalaisaaascarcearesource.aInvestorsaandacreditorsahaveatoamakeadecisionsaasatoahowamuchacapita
latoainvestainaanyagivenaentity;atherefore,atheyademandarelevantaandafaithfullyarepresentativeainforma
tionaaboutatheaeconomicaperformanceaandafinancialapositionaofaaacompany.aThisainformationaisaprov
idedainatheafinancialastatements.
Q1-
4aExternalaauditorsaensureathatatheamanagementaofaaacompanyahasapreparedafinancialastatementsaina
accordanceawithaGenerallyaAcceptedaAccountingaPrinciplesaandafairlyapresentatheafinancialapositio
naandaeconomicaperformanceaofaaacompany.aInaaddition,aexternalaauditorsamustabeaanaindependenta
partyaandacannotabeaemployeesaofatheacompanyatheyaareaauditing.aExternalaauditorsaprovideaaasigni
ficantaamountaofacredibilityatoatheafinancialastatements.
Q1-
5aDataaanalyticsaisatheaprocessaofaanalyzingalargeadataasetsainaorderatoadrawausefulaconclusions.aItain
volvesaconvertingarawadataaintoausefulaknowledge.aInafinancialareporting,adataaanalyticsacanabeause
datoaimproveatheaqualityaofaestimatesaandavaluations.
Q1-
6aStandardasettersacreateaaccountingaconcepts,arules,aandaguidelinesatoaensureathatafinancialastateme
ntsaaccuratelyapresentatheaeconomicaperformanceaandafinancialapositionaofaaafirm.aTheastandardsaen
courageatransparentaandatruthfulareporting.
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NG a
Q1-
7aU.S.acompaniesalistedaonaU.S.astockaexchangesadoanotahaveatheaoptionatoareportaunderaIFRS.aHow
ever,aforeignacompaniesathatatradeainatheaU.S.aexchangesacanareportaunderaIFRS.aTheaSECapermitsat
heauseaofaIFRS-
basedafinancialastatementsabyainternationalacompaniesawithasharesatradingaonaU.S.astockaexchanges
.
Q1-
8aTheaFASBaseeksaandawelcomesacommentsafromaallapartiesainatheafinancialareportingaprocessaincl
udingamanagers,ainvestors,aaccountants,apreparers,acreditors,alenders,afinancialastatementausers,ago
vernmentalaagencies,afinancialaanalysts,aindustryagroups,aandaauditors.aFASBaalsoareceivesafeedbac
kafromapublicaroundtableadiscussions,apublicameetings,atheaFASAC,atheaPrivateaCompanyaCouncil,
aandaEITF.
Q1-
9aYes,atheapromulgationaofafinancialaaccountingastandardsaisaaapoliticalaprocess.aThereaareaseveralag
roupsathatainfluenceatheastandardasettingaprocess.aTheastandardasettingaprocessaisaaapoliticalaprocessa
thataisaaffectedabyatheaimpactaofaseveralalobbyingagroups.aTheagovernment,athroughatheaSEC,ainflue
ncesaaccountingastandards.aTheaSECahasatheaauthorityatoaissueaaccountingastandardsabutahasaassigne
dathisaresponsibilityatoatheaprivateasector.aNonetheless,atheaSECacanaexertapressureaonatheaFASBatoai
ssueaaccountingastandardsaandavetoatheastandardsapromulgatedabyatheaFASB.aAuditingafirms,atheaco
rporateasector,acreditors,afinancialaanalysts,atheafinancialacommunity,aaccountingaorganizations,ain
dustryagroups,aandainvestorsacanainfluenceatheaFASBabyawrittenacommentsaaboutaExposureaDraftsaa
ndaparticipationainapublicameetingsaandapublicaroundtablesaregardingaaaproposedafinancialareportin
gastandard.
Q1-10aAaprinciples-
basedastandardaisaconsistentawithaaatheoreticalaframework.aInacontrast,aaarules-
basedastandardadoesanotanecessarilyarelyaonaaaconsistentatheoreticalaframework.aRather,aitacontain
samoreaspecificaandaprescriptivearules.
Q1-
11aRecently,atheaFASBahasatakenaanaasset/liabilityaapproachainasettingastandards.aWithathisaapproac
h,aaatransactionaisarecordedabasedaonawhetheraanaassetaoraliabilityaisacreated.aAnotheratrendahasabeen
atheamovementatowardatheauseaofafairavalueameasurementsaasaanaalternativeatoahistoricalacost.aFASB
ahasaalsoafocusedaonatheapromulgationaofaprinciples-basedastandardsainsteadaofarules-
basedastandards.
BriefaExercisesaSoluti
onatoaBE1-1
General-
purposeafinancialastatementsaprovideageneralafinancialainformationaaboutaanaentityathatawillabeausef
ulatoamanyatypesaofausers.aGeneral-
purposeafinancialastatementsaprovideainformationatoaaawideaspectrumaofauseragroups:ainvestors,acred
itors,afinancialaanalysts,acustomers,aemployees,acompetitors,asuppliers,aunions,aandagovernmentaag
encies.aMostafinancialainformationainageneralapurposeafinancialastatementsaisaprovidedatoasatisfyause
rsawithalimitedaabilityaoraauthorityatoaobtainaadditionalainformation,awhichaincludesainvestorsaandacr
editors.aTheaFinancialaAccountingaStandardsaBoarda(FASB)aidentifiesainvestors,alenders,aandaother
©a2021aPearsonaEducation,aInc.
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a creditorsaasatheaprimaryausersaofatheafinancialastatements.
©a2021aPearsonaEducation,aInc.
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NG a
SolutionatoaBE1-2
Financialaaccountingaisatheaprocessaofaidentifying,ameasuring,aandacommunicatingafinancialainfor
mationaaboutaanaeconomicaentityatoavariousauseragroupsawithinathealegal,aeconomic,apolitical,aandas
ocialaenvironment.aThisadefinitionacontainsafouramajoraelements:a1.a Financialainformation;a2.Econ
omicaentity;a3.aUseragroupsaanda4.aLegal,aeconomic,apolitical,aandasocialaenvironment
SolutionatoaBE1-3
FinancialaStatementaUsersa
andaOtheraParties Role
10. Areashareholdersaofatheacompany.
a 10aEquityaInvestors
1. Areabanksaandaotherafinancialainstitutionsathatalenda
a 1aCreditors moneyatoatheacompany.
5.a Useafinancialainformationatoareviewaandaanalyzear
a5aFinancialaAnalysts eportedaresultsaofatheacompaniesatheyacoveraandam
akeainvestmentarecommendations.
a8aEmployeesaandaLaboraUnions
8. Useafinancialainformationaduringanegotiationaofane
a2aSuppliersaandaCustomers walaboraagreementsaandacompensationacontracts.
2. Useafinancialastatementsatoadetermineawhetheratoa
a7aGovernmentaAgencies conductabusinessaorapurchaseaproductsafromaaaco
mpany.
a 3aCompetitors 7.a Reviewatheafinancialastatementsaofapubliclyatradedaco
mpaniesaforaaavarietyaofareasonsathataareainatheapublica
a 4aExternalaAuditors
interest.
a 6aInternalaAuditors 3. Useafinancialainformationatoadetermineatheiramarketa
positionarelativeatoatheareportingaentityaandatoaattemp
a 11aRegulatoryaBodies tatoaidentifyafutureastrategiesaofatheareportingaentity.
4. Areaindependentaofatheacompanyaandaresponsibleaf
a9aProfessionalaOrganizations oraensuringathatamanagementapreparesaandaissuesafi
nancialastatementsathatacomplyawithaaccountingast
andardsaandafairlyapresentatheafinancialapositionaan
daeconomicaperformanceaofatheacompany.
6.a Areaemployeesaofatheacompanyaservingainaanaadvisory
aroleatoamanagement.aTheya provideainformationatoam
anagementaregardingatheacompany‘saoperationsaandap
roperafunctioningaofaitsainternalacontrols.
11. Protectainvestorsaandaoverseeatheaaccountingaanda
auditingastandardasettingaprocesses.
9. Supportaaccountingaprofessionalsathroughoutatheir
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careersabyaprovidingatraining,aprofessionalaskillsadevel
opment,aandaotheraresources.
SolutionatoaBE1-4
Financialastatementausersaandawhyaeachawouldauseatheafinancialastatementsaareasummarizedabelow:
1. Equityainvestorsa-
aEquityainvestorsabuyastockainatheacompany,athatais,atheyapurchaseaaapercentageaofatheaco
mpanyaitself.aTheafinancialastatementsahelpathemamakeainvestmentadecisions.
2. Creditorsa-
aCreditorsaloanamoneyatoatheacompany.aTheafinancialastatementsahelpathemaassessatheacreditwo
rthinessaofatheacompany,aandawhetheraprincipalaandainterestawillabearepaid.
3. Competitorsa-
aCompetitorsauseafinancialastatementsatoadetermineatheiramarketapositionarelativeatoathear
eportingaentity.
©a2021aPearsonaEducation,aInc.
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NG a
4. Financialaanalystsa-
aFinancialaanalystsauseafinancialastatementsatoaperformafinancialaanalyses.aTheiraanalysesaoftena
resultainaaarecommendationaasatoawhetherainvestorsashouldabuyaorasellatheastockaofathatacompan
y.aTheseaanalystsaactaasamarketaintermediaries.
5. Employeesaandalaboraunionsa-
aEmployeesaandalaboraunionsauseatheafinancialastatementsatoaassessatheacompany‘saeconomicap
erformanceaandaliquidity,awhichaareaimportantainformationainawageanegotiations.
6. Suppliersaandacustomersa-
aSuppliersaandacustomersacanauseatheafinancialastatementsatoadetermineaaacompany‘safinancial
apositionaandawhetheratheya wantatoadoabusinessawithatheacompany.aForasuppliers,aitaisaimporta
ntatoaassessatheacompany‘saabilityatoapayaforagoodsaandaservices.aForacustomers,aitaisaimportanta
toaassessatheacompany‘saabilityatoahonorawarranties.
©a2021aPearsonaEducation,aInc.
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SolutionatoaBE1-5
Partiesainatheafinancialareportingaprocessaandawhyaeachawouldabeainterestedainatheafinancialastateme
nts:
1. Auditorsa–
aExternalaauditorsaareaimportantaplayersainatheafinancialareportingaprocess.a Itaisatheirajobatoaens
ureathatatheamanagementaofatheacompanyahasapreparedafinancialastatementsathatafollowatheaac
countingarulesaandafairlyapresentatheafinancialapositionaandaeconomicaperformanceaofatheacom
pany.aBecauseaauditorsaareaanaindependentaparty,atheyalendaaasignificantaamountaofacredibility
atoatheafinancialastatements.aExternalaauditorsawillacarefullya examineatheafinancialastatements.
2. AccountingastandardasettersasuchaasatheaFinancialaAccountingaStandardsaBoardaandatheaInterna
tionalaAccountingaStandardsaBoarda-
aStandardasettersacreateaaccountingaconcepts,arules,aandaguidelinesathatawillaresultainafinancialast
atementsathataprovideafinancialainformationathataisarelevantaandathatafaithfullyarepresentsatheafin
ancialaperformanceaandapositionaofatheareportingaentity.
3. RegulatoryabodiesasuchaasatheaSecuritiesaandaExchangeaCommissionaandatheaPublicaCompanyaA
ccountingaOversightaBoarda-
aTheaSecuritiesaandaExchangeaCommission‘saroleaisatoaprotectainvestors.aTheya overseeatheaacco
untingastandardasettingaprocess,aincludingagivingatheaFASBatheaauthorityatoadetermineaU.S.aGA
AP.aTheyaalsoareviewatheafilingsaofapublicacompaniesainatheaU.S.,awhichaincludesatheafinancialas
tatementsaandafootnotes.aTheaPublicaCompanyaAccountingaOversightaBoarda(PCAOB)asetsaaud
itingastandardsaandaoverseesatheaauditsaofapublicacompaniesainatheaU.S.aExternalaauditorsafocusa
onatheafinancialastatements.
SolutionatoaBE1-6
Theasecondaelementainatheadefinitionaofafinancialaaccountingainvolvesatheaeconomicaentityaforawhich
atheafinancialastatementsaandaotherafinancialainformationaareapresented.aAnaeconomica entityaisaanao
rganizationaoraunitawithaactivitiesathataareaseparateafromathoseaofaitsaownersaandaotheraentities.aFinan
cialainformationaalwaysarelatesatoaaaparticularaeconomicaentity.aEconomicaentitiesacanabeacorporatio
ns,apartnerships,asoleaproprietorships,aoragovernmentalaorganizations.aAlso,aeconomicaentitiesamaya
beaprivatelyaheldaorapubliclyaheld.aIfatheaentityaisapubliclyaheld,athenaitsaequityacanabeaboughtaandasol
dabyaexternalapartiesaonastockaexchanges.
©a2021aPearsonaEducation,aInc.
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NG a
SolutionatoaBE1-7
Accountingastandardasettersafollowaaaprocessatoasetaaccountingastandardsathatainvolvesafinancialastat
ementapreparers,ausersaandaotherainterestedapartiesaataseveralastages.
InaidentifyingaissuesatoaconsiderabyatheaFASB,astandardasettersaconsiderainputafromatheseap
arties.
Onceaanaissueaisaaddedatoatheatechnicalaagenda,astandardasettersausuallyahaveapublicam
eetingsawhereatheyaseekacommentsafromatheseainterestedaparties.
Whenaanaexposureadraftaisaissued,ainterestedapartiesaareainvitedatoaprepareacommentale
tters.
Afteraanaexposureadraftaisaissued,astandardasettersasometimesaholdaroundtables,aorapublicaf
orums,awhichaincludeatheseavariousaparties.
Whenadeliberatingaonaanaissueabeforeapublishingaaafinalastandard,atheastandardasettersac
onsideratheainputsaobtainedafromaoutsideapartiesaatatheavariousastagesainatheastandardaset
tingaprocess.
TheaIASBausesaaasimilaraprocess.
SolutionatoaBE1-8
TheaFASBafollowsaaaseven-stepaprocessatoaissueaaafinalastandard.
Stepa1:Identificationaofaanaissue.aFASBaidentifiesaaafinancialareportingaissueabasedaonarecommen
dationsafromaanalysts,agovernmentaagencies,aoraotheramarketaparticipants.
Stepa2:Decisionatoapursue.aAfteraconsultationawithaFASBamembersaandaothersaasaappropriate,athea
FASBaChairpersonadecidesawhetheratoaaddatheaissueatoatheatechnicalaagenda.
Stepa3:Publicameetings.aOnceaaddedatoatheatechnicalaagenda,atheaBoardaholdsapublicameetingsawhe
reaitadeliberatesatheavariousaissuesaidentifiedabyatheaFASBastaff.
Stepa4:ExposureaDraft.aTheaBoardaissuesaanaExposureaDrafta(ED),awhichaisaintendedatoasolicitainp
utafromafinancialastatementapreparers,aauditors,aandausersaofatheafinancialastatements.
Stepa5:Publica roundtables.aTheaBoardamayaholdapublicaroundtablesatoadiscussatheaED,aifaneeded.
Stepa6:Redeliberation.aTheaFASBastaffaanalyzesatheacommentalettersareceivedafromapreparers,afin
ancialastatementausersaandaauditors,apublicaroundtableadiscussions,aandaanyaotherainformatio
n.aTheaBoardathenaredeliberatesatheaissue.
Stepa7:Publicationaofatheafinalastandard.aTheaBoardaissuesaanaAccountingaStandardsaUpdatea(AS
U),awhichaisatheafinalastandard.aItarequiresaaamajorityavoteaofatheaBoardatoaissueaaanewastandar
d.aTheaASUawillathenabeaincorporatedaintoatheabodyaofatheaAccountingaStandardsaCodificati
onathatamakesaupaU.S.aGAAP.
©a2021aPearsonaEducation,aInc.
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SolutionatoaBE1-9
TheastepsainatheaFinancialaAccountingaStandardsaBoard‘sastandardasettingaprocessainatheacorrect
orderafroma1atoa 7.
a 4 TheaBoardaissuesaanaExposureaDrafta(ED),awhichaisaintendedatoasolicita input.
a 2
AfteraconsultationawithaFASBamembersaandaothersaasaappropriate,atheaFASBaChairper
sonadecidesawhetheratoaaddatheaissueatoatheatechnicalaagenda.
a 6
TheaFASBastaffaanalyzesatheacommentalettersareceived,apublicaroundtableadiscussionsa
andaanyaotherainformation.aTheaBoardathenaredeliberatesatheaissue.
a 5 TheaBoardamayaholdapublicaroundtablesatoadiscussatheaED,aifaneeded.
a 7
TheaBoardaissuesaanaAccountingaStandardsaUpdatea(ASU),awhichaisatheafinalastandard
.aItathenaincorporatesatheaASUaintoatheaAccountingaStandardsaCodificationathatamakesaup
U.S.aGAAP.
a 1
Aafinancialareportingaissueaisaidentifiedaeitherabyarequestsaofafinancialastatementausers
aorabyasomeaotherameans.
a 3
TheaBoardaholdsapublicameetingsawhereaitadeliberatesatheavariousaissuesaidentifiedabya
theaFASBastaff.
SolutionatoaBE1-10
TheaIASBaisacomprisedaofa14amembersawhoaareaappointedabyatheaIFRSaFoundation‘saboardaofatruste
es.aAtaleasta11amembersaserveafullatime,aandanotamoreathanathreeacanabeapart-
timeamembers.aToaensureabroadaandadiverseainternationalarepresentation,atheaIASBaisacomposedaof:
• FouramembersafromatheaAsia/Oceaniaaregion.
• FouramembersafromaEurope.
• FouramembersafromatheaAmericas.
• OneamemberafromaAfrica.
• Oneamemberaappointedafromaanyaarea,asubjectatoamaintainingaoverallageographicalabalance.
SolutionatoaBE1-11
U.S.afinancialareportingastandardasettingabeganawithathea1934aSecuritiesaExchangeaAct,awhichagavea
theaSECatheapoweratoapromulgateaaccountingastandardsaforaallapubliclyatradedafirms.aTheaSECadeleg
atedaitsastandard-
settingapoweratoatheaprivateasector,apromptingatheaaccountingaprofessionatoaestablishatheafirstaU.S.ast
andard-
settingaboard.aCurrently,atheaSECaissuesastandardsaandacontinuesainaanaoversightafunctionaoverathea
USastandards-settingabodiesasuchaasatheaFASB.
©a2021aPearsonaEducation,aInc.
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SolutionatoaBE1-12
Theaitemsabelowaareacharacteristicsaofaaaprinciples-baseda(P)aorarules-baseda(R)aaccountingasystem:
PaProvidesaaaclearadiscussionaofatheaaccountingaobjectivearelatedatoatheastandard
a
RaContainsadetailedaapplicationaguidance
a
RaContainsanumerousaexceptionsatoatheatypesaofafirmsaandaindustriesathataareacovere
a
d
PaInvolvesanoabright-lineatests
a
RaContainsanumerousabright-lineatests
a
PaInvolvesaaasignificantaamountaofainterpretationainaapplication
a
PaInvolvesafew,aifaany,aexceptions
a
PaProvidesainsufficientaguidanceatoaimplementatheastandard
a
RaWouldanotarelyaonaextensiveauseaofaprofessionalajudgment
a
RaResultsainainconsistenciesabetweenastandards
a
©a2021aPearsonaEducation,aInc.
The Financial Reporting Environment
Solutions
Questions
Q1-
1aFinancialainformationaisaaamuchabroaderaconceptathanasimplyatheafinancialastatementsaandafootnot
esatoatheafinancialastatements.aFinancialainformationaincludesaitemsasuchaasatheaPresident‘saletteratoat
heaowners,amanagement‘sadiscussionaandaanalysis,atheaauditors‘areport,atheamanagementareportaand
apressareleases.aOfacourse,atheabasicafinancialastatementsaandafootnotesaareaincludedainatheatermafina
ncialainformation.aTheabasicafinancialastatementsaare:atheabalanceasheeta(alsoa referredatoaasatheastate
mentaofafinancialaposition),atheastatementaofacomprehensiveaincomea(alsoareferredatoaasatheastateme
ntaofanetaincomeaandatheastatementaofacomprehensiveaincome),atheastatementaofacashaflows,aandathea
statementaofashareholders‘aequity.aFinancialainformationaisanotasynonymousawithatheatermafinancial
astatementsabecauseatheafinancialastatementsaareaaasubsetaofatheadifferentatypesaofafinancialainformat
ionaprovided.
Q1-
2aTheapurposeaofageneratingafinancialastatementsaisatoaprovideausefulainformationatoausersatoaevalua
teaeconomicaentitiesaandamakeaefficientaresourceaallocationadecisionsabasedaonathearisksaandareturns
aofaaaparticularainvestment.aTheaFinancialaAccountingaStandardsaBoarda(FASB)aidentifiesainvestor
s,alendersaandaotheracreditorsaasatheaprimaryausersaofatheafinancialastatements.aTheafinancialastateme
ntsaareatheaculminationaofatheafinancialareportingaprocess.
Q1-
3aCapitalaisaaascarcearesource.aInvestorsaandacreditorsahaveatoamakeadecisionsaasatoahowamuchacapita
latoainvestainaanyagivenaentity;atherefore,atheyademandarelevantaandafaithfullyarepresentativeainforma
tionaaboutatheaeconomicaperformanceaandafinancialapositionaofaaacompany.aThisainformationaisaprov
idedainatheafinancialastatements.
Q1-
4aExternalaauditorsaensureathatatheamanagementaofaaacompanyahasapreparedafinancialastatementsaina
accordanceawithaGenerallyaAcceptedaAccountingaPrinciplesaandafairlyapresentatheafinancialapositio
naandaeconomicaperformanceaofaaacompany.aInaaddition,aexternalaauditorsamustabeaanaindependenta
partyaandacannotabeaemployeesaofatheacompanyatheyaareaauditing.aExternalaauditorsaprovideaaasigni
ficantaamountaofacredibilityatoatheafinancialastatements.
Q1-
5aDataaanalyticsaisatheaprocessaofaanalyzingalargeadataasetsainaorderatoadrawausefulaconclusions.aItain
volvesaconvertingarawadataaintoausefulaknowledge.aInafinancialareporting,adataaanalyticsacanabeause
datoaimproveatheaqualityaofaestimatesaandavaluations.
Q1-
6aStandardasettersacreateaaccountingaconcepts,arules,aandaguidelinesatoaensureathatafinancialastateme
ntsaaccuratelyapresentatheaeconomicaperformanceaandafinancialapositionaofaaafirm.aTheastandardsaen
courageatransparentaandatruthfulareporting.
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Q1-
7aU.S.acompaniesalistedaonaU.S.astockaexchangesadoanotahaveatheaoptionatoareportaunderaIFRS.aHow
ever,aforeignacompaniesathatatradeainatheaU.S.aexchangesacanareportaunderaIFRS.aTheaSECapermitsat
heauseaofaIFRS-
basedafinancialastatementsabyainternationalacompaniesawithasharesatradingaonaU.S.astockaexchanges
.
Q1-
8aTheaFASBaseeksaandawelcomesacommentsafromaallapartiesainatheafinancialareportingaprocessaincl
udingamanagers,ainvestors,aaccountants,apreparers,acreditors,alenders,afinancialastatementausers,ago
vernmentalaagencies,afinancialaanalysts,aindustryagroups,aandaauditors.aFASBaalsoareceivesafeedbac
kafromapublicaroundtableadiscussions,apublicameetings,atheaFASAC,atheaPrivateaCompanyaCouncil,
aandaEITF.
Q1-
9aYes,atheapromulgationaofafinancialaaccountingastandardsaisaaapoliticalaprocess.aThereaareaseveralag
roupsathatainfluenceatheastandardasettingaprocess.aTheastandardasettingaprocessaisaaapoliticalaprocessa
thataisaaffectedabyatheaimpactaofaseveralalobbyingagroups.aTheagovernment,athroughatheaSEC,ainflue
ncesaaccountingastandards.aTheaSECahasatheaauthorityatoaissueaaccountingastandardsabutahasaassigne
dathisaresponsibilityatoatheaprivateasector.aNonetheless,atheaSECacanaexertapressureaonatheaFASBatoai
ssueaaccountingastandardsaandavetoatheastandardsapromulgatedabyatheaFASB.aAuditingafirms,atheaco
rporateasector,acreditors,afinancialaanalysts,atheafinancialacommunity,aaccountingaorganizations,ain
dustryagroups,aandainvestorsacanainfluenceatheaFASBabyawrittenacommentsaaboutaExposureaDraftsaa
ndaparticipationainapublicameetingsaandapublicaroundtablesaregardingaaaproposedafinancialareportin
gastandard.
Q1-10aAaprinciples-
basedastandardaisaconsistentawithaaatheoreticalaframework.aInacontrast,aaarules-
basedastandardadoesanotanecessarilyarelyaonaaaconsistentatheoreticalaframework.aRather,aitacontain
samoreaspecificaandaprescriptivearules.
Q1-
11aRecently,atheaFASBahasatakenaanaasset/liabilityaapproachainasettingastandards.aWithathisaapproac
h,aaatransactionaisarecordedabasedaonawhetheraanaassetaoraliabilityaisacreated.aAnotheratrendahasabeen
atheamovementatowardatheauseaofafairavalueameasurementsaasaanaalternativeatoahistoricalacost.aFASB
ahasaalsoafocusedaonatheapromulgationaofaprinciples-basedastandardsainsteadaofarules-
basedastandards.
BriefaExercisesaSoluti
onatoaBE1-1
General-
purposeafinancialastatementsaprovideageneralafinancialainformationaaboutaanaentityathatawillabeausef
ulatoamanyatypesaofausers.aGeneral-
purposeafinancialastatementsaprovideainformationatoaaawideaspectrumaofauseragroups:ainvestors,acred
itors,afinancialaanalysts,acustomers,aemployees,acompetitors,asuppliers,aunions,aandagovernmentaag
encies.aMostafinancialainformationainageneralapurposeafinancialastatementsaisaprovidedatoasatisfyause
rsawithalimitedaabilityaoraauthorityatoaobtainaadditionalainformation,awhichaincludesainvestorsaandacr
editors.aTheaFinancialaAccountingaStandardsaBoarda(FASB)aidentifiesainvestors,alenders,aandaother
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NaT
a creditorsaasatheaprimaryausersaofatheafinancialastatements.
©a2021aPearsonaEducation,aInc.
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NG a
SolutionatoaBE1-2
Financialaaccountingaisatheaprocessaofaidentifying,ameasuring,aandacommunicatingafinancialainfor
mationaaboutaanaeconomicaentityatoavariousauseragroupsawithinathealegal,aeconomic,apolitical,aandas
ocialaenvironment.aThisadefinitionacontainsafouramajoraelements:a1.a Financialainformation;a2.Econ
omicaentity;a3.aUseragroupsaanda4.aLegal,aeconomic,apolitical,aandasocialaenvironment
SolutionatoaBE1-3
FinancialaStatementaUsersa
andaOtheraParties Role
10. Areashareholdersaofatheacompany.
a 10aEquityaInvestors
1. Areabanksaandaotherafinancialainstitutionsathatalenda
a 1aCreditors moneyatoatheacompany.
5.a Useafinancialainformationatoareviewaandaanalyzear
a5aFinancialaAnalysts eportedaresultsaofatheacompaniesatheyacoveraandam
akeainvestmentarecommendations.
a8aEmployeesaandaLaboraUnions
8. Useafinancialainformationaduringanegotiationaofane
a2aSuppliersaandaCustomers walaboraagreementsaandacompensationacontracts.
2. Useafinancialastatementsatoadetermineawhetheratoa
a7aGovernmentaAgencies conductabusinessaorapurchaseaproductsafromaaaco
mpany.
a 3aCompetitors 7.a Reviewatheafinancialastatementsaofapubliclyatradedaco
mpaniesaforaaavarietyaofareasonsathataareainatheapublica
a 4aExternalaAuditors
interest.
a 6aInternalaAuditors 3. Useafinancialainformationatoadetermineatheiramarketa
positionarelativeatoatheareportingaentityaandatoaattemp
a 11aRegulatoryaBodies tatoaidentifyafutureastrategiesaofatheareportingaentity.
4. Areaindependentaofatheacompanyaandaresponsibleaf
a9aProfessionalaOrganizations oraensuringathatamanagementapreparesaandaissuesafi
nancialastatementsathatacomplyawithaaccountingast
andardsaandafairlyapresentatheafinancialapositionaan
daeconomicaperformanceaofatheacompany.
6.a Areaemployeesaofatheacompanyaservingainaanaadvisory
aroleatoamanagement.aTheya provideainformationatoam
anagementaregardingatheacompany‘saoperationsaandap
roperafunctioningaofaitsainternalacontrols.
11. Protectainvestorsaandaoverseeatheaaccountingaanda
auditingastandardasettingaprocesses.
9. Supportaaccountingaprofessionalsathroughoutatheir
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NaT
careersabyaprovidingatraining,aprofessionalaskillsadevel
opment,aandaotheraresources.
SolutionatoaBE1-4
Financialastatementausersaandawhyaeachawouldauseatheafinancialastatementsaareasummarizedabelow:
1. Equityainvestorsa-
aEquityainvestorsabuyastockainatheacompany,athatais,atheyapurchaseaaapercentageaofatheaco
mpanyaitself.aTheafinancialastatementsahelpathemamakeainvestmentadecisions.
2. Creditorsa-
aCreditorsaloanamoneyatoatheacompany.aTheafinancialastatementsahelpathemaassessatheacreditwo
rthinessaofatheacompany,aandawhetheraprincipalaandainterestawillabearepaid.
3. Competitorsa-
aCompetitorsauseafinancialastatementsatoadetermineatheiramarketapositionarelativeatoathear
eportingaentity.
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NG a
4. Financialaanalystsa-
aFinancialaanalystsauseafinancialastatementsatoaperformafinancialaanalyses.aTheiraanalysesaoftena
resultainaaarecommendationaasatoawhetherainvestorsashouldabuyaorasellatheastockaofathatacompan
y.aTheseaanalystsaactaasamarketaintermediaries.
5. Employeesaandalaboraunionsa-
aEmployeesaandalaboraunionsauseatheafinancialastatementsatoaassessatheacompany‘saeconomicap
erformanceaandaliquidity,awhichaareaimportantainformationainawageanegotiations.
6. Suppliersaandacustomersa-
aSuppliersaandacustomersacanauseatheafinancialastatementsatoadetermineaaacompany‘safinancial
apositionaandawhetheratheya wantatoadoabusinessawithatheacompany.aForasuppliers,aitaisaimporta
ntatoaassessatheacompany‘saabilityatoapayaforagoodsaandaservices.aForacustomers,aitaisaimportanta
toaassessatheacompany‘saabilityatoahonorawarranties.
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NaT
SolutionatoaBE1-5
Partiesainatheafinancialareportingaprocessaandawhyaeachawouldabeainterestedainatheafinancialastateme
nts:
1. Auditorsa–
aExternalaauditorsaareaimportantaplayersainatheafinancialareportingaprocess.a Itaisatheirajobatoaens
ureathatatheamanagementaofatheacompanyahasapreparedafinancialastatementsathatafollowatheaac
countingarulesaandafairlyapresentatheafinancialapositionaandaeconomicaperformanceaofatheacom
pany.aBecauseaauditorsaareaanaindependentaparty,atheyalendaaasignificantaamountaofacredibility
atoatheafinancialastatements.aExternalaauditorsawillacarefullya examineatheafinancialastatements.
2. AccountingastandardasettersasuchaasatheaFinancialaAccountingaStandardsaBoardaandatheaInterna
tionalaAccountingaStandardsaBoarda-
aStandardasettersacreateaaccountingaconcepts,arules,aandaguidelinesathatawillaresultainafinancialast
atementsathataprovideafinancialainformationathataisarelevantaandathatafaithfullyarepresentsatheafin
ancialaperformanceaandapositionaofatheareportingaentity.
3. RegulatoryabodiesasuchaasatheaSecuritiesaandaExchangeaCommissionaandatheaPublicaCompanyaA
ccountingaOversightaBoarda-
aTheaSecuritiesaandaExchangeaCommission‘saroleaisatoaprotectainvestors.aTheya overseeatheaacco
untingastandardasettingaprocess,aincludingagivingatheaFASBatheaauthorityatoadetermineaU.S.aGA
AP.aTheyaalsoareviewatheafilingsaofapublicacompaniesainatheaU.S.,awhichaincludesatheafinancialas
tatementsaandafootnotes.aTheaPublicaCompanyaAccountingaOversightaBoarda(PCAOB)asetsaaud
itingastandardsaandaoverseesatheaauditsaofapublicacompaniesainatheaU.S.aExternalaauditorsafocusa
onatheafinancialastatements.
SolutionatoaBE1-6
Theasecondaelementainatheadefinitionaofafinancialaaccountingainvolvesatheaeconomicaentityaforawhich
atheafinancialastatementsaandaotherafinancialainformationaareapresented.aAnaeconomica entityaisaanao
rganizationaoraunitawithaactivitiesathataareaseparateafromathoseaofaitsaownersaandaotheraentities.aFinan
cialainformationaalwaysarelatesatoaaaparticularaeconomicaentity.aEconomicaentitiesacanabeacorporatio
ns,apartnerships,asoleaproprietorships,aoragovernmentalaorganizations.aAlso,aeconomicaentitiesamaya
beaprivatelyaheldaorapubliclyaheld.aIfatheaentityaisapubliclyaheld,athenaitsaequityacanabeaboughtaandasol
dabyaexternalapartiesaonastockaexchanges.
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NG a
SolutionatoaBE1-7
Accountingastandardasettersafollowaaaprocessatoasetaaccountingastandardsathatainvolvesafinancialastat
ementapreparers,ausersaandaotherainterestedapartiesaataseveralastages.
InaidentifyingaissuesatoaconsiderabyatheaFASB,astandardasettersaconsiderainputafromatheseap
arties.
Onceaanaissueaisaaddedatoatheatechnicalaagenda,astandardasettersausuallyahaveapublicam
eetingsawhereatheyaseekacommentsafromatheseainterestedaparties.
Whenaanaexposureadraftaisaissued,ainterestedapartiesaareainvitedatoaprepareacommentale
tters.
Afteraanaexposureadraftaisaissued,astandardasettersasometimesaholdaroundtables,aorapublicaf
orums,awhichaincludeatheseavariousaparties.
Whenadeliberatingaonaanaissueabeforeapublishingaaafinalastandard,atheastandardasettersac
onsideratheainputsaobtainedafromaoutsideapartiesaatatheavariousastagesainatheastandardaset
tingaprocess.
TheaIASBausesaaasimilaraprocess.
SolutionatoaBE1-8
TheaFASBafollowsaaaseven-stepaprocessatoaissueaaafinalastandard.
Stepa1:Identificationaofaanaissue.aFASBaidentifiesaaafinancialareportingaissueabasedaonarecommen
dationsafromaanalysts,agovernmentaagencies,aoraotheramarketaparticipants.
Stepa2:Decisionatoapursue.aAfteraconsultationawithaFASBamembersaandaothersaasaappropriate,athea
FASBaChairpersonadecidesawhetheratoaaddatheaissueatoatheatechnicalaagenda.
Stepa3:Publicameetings.aOnceaaddedatoatheatechnicalaagenda,atheaBoardaholdsapublicameetingsawhe
reaitadeliberatesatheavariousaissuesaidentifiedabyatheaFASBastaff.
Stepa4:ExposureaDraft.aTheaBoardaissuesaanaExposureaDrafta(ED),awhichaisaintendedatoasolicitainp
utafromafinancialastatementapreparers,aauditors,aandausersaofatheafinancialastatements.
Stepa5:Publica roundtables.aTheaBoardamayaholdapublicaroundtablesatoadiscussatheaED,aifaneeded.
Stepa6:Redeliberation.aTheaFASBastaffaanalyzesatheacommentalettersareceivedafromapreparers,afin
ancialastatementausersaandaauditors,apublicaroundtableadiscussions,aandaanyaotherainformatio
n.aTheaBoardathenaredeliberatesatheaissue.
Stepa7:Publicationaofatheafinalastandard.aTheaBoardaissuesaanaAccountingaStandardsaUpdatea(AS
U),awhichaisatheafinalastandard.aItarequiresaaamajorityavoteaofatheaBoardatoaissueaaanewastandar
d.aTheaASUawillathenabeaincorporatedaintoatheabodyaofatheaAccountingaStandardsaCodificati
onathatamakesaupaU.S.aGAAP.
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NaT
SolutionatoaBE1-9
TheastepsainatheaFinancialaAccountingaStandardsaBoard‘sastandardasettingaprocessainatheacorrect
orderafroma1atoa 7.
a 4 TheaBoardaissuesaanaExposureaDrafta(ED),awhichaisaintendedatoasolicita input.
a 2
AfteraconsultationawithaFASBamembersaandaothersaasaappropriate,atheaFASBaChairper
sonadecidesawhetheratoaaddatheaissueatoatheatechnicalaagenda.
a 6
TheaFASBastaffaanalyzesatheacommentalettersareceived,apublicaroundtableadiscussionsa
andaanyaotherainformation.aTheaBoardathenaredeliberatesatheaissue.
a 5 TheaBoardamayaholdapublicaroundtablesatoadiscussatheaED,aifaneeded.
a 7
TheaBoardaissuesaanaAccountingaStandardsaUpdatea(ASU),awhichaisatheafinalastandard
.aItathenaincorporatesatheaASUaintoatheaAccountingaStandardsaCodificationathatamakesaup
U.S.aGAAP.
a 1
Aafinancialareportingaissueaisaidentifiedaeitherabyarequestsaofafinancialastatementausers
aorabyasomeaotherameans.
a 3
TheaBoardaholdsapublicameetingsawhereaitadeliberatesatheavariousaissuesaidentifiedabya
theaFASBastaff.
SolutionatoaBE1-10
TheaIASBaisacomprisedaofa14amembersawhoaareaappointedabyatheaIFRSaFoundation‘saboardaofatruste
es.aAtaleasta11amembersaserveafullatime,aandanotamoreathanathreeacanabeapart-
timeamembers.aToaensureabroadaandadiverseainternationalarepresentation,atheaIASBaisacomposedaof:
• FouramembersafromatheaAsia/Oceaniaaregion.
• FouramembersafromaEurope.
• FouramembersafromatheaAmericas.
• OneamemberafromaAfrica.
• Oneamemberaappointedafromaanyaarea,asubjectatoamaintainingaoverallageographicalabalance.
SolutionatoaBE1-11
U.S.afinancialareportingastandardasettingabeganawithathea1934aSecuritiesaExchangeaAct,awhichagavea
theaSECatheapoweratoapromulgateaaccountingastandardsaforaallapubliclyatradedafirms.aTheaSECadeleg
atedaitsastandard-
settingapoweratoatheaprivateasector,apromptingatheaaccountingaprofessionatoaestablishatheafirstaU.S.ast
andard-
settingaboard.aCurrently,atheaSECaissuesastandardsaandacontinuesainaanaoversightafunctionaoverathea
USastandards-settingabodiesasuchaasatheaFASB.
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NG a
SolutionatoaBE1-12
Theaitemsabelowaareacharacteristicsaofaaaprinciples-baseda(P)aorarules-baseda(R)aaccountingasystem:
PaProvidesaaaclearadiscussionaofatheaaccountingaobjectivearelatedatoatheastandard
a
RaContainsadetailedaapplicationaguidance
a
RaContainsanumerousaexceptionsatoatheatypesaofafirmsaandaindustriesathataareacovere
a
d
PaInvolvesanoabright-lineatests
a
RaContainsanumerousabright-lineatests
a
PaInvolvesaaasignificantaamountaofainterpretationainaapplication
a
PaInvolvesafew,aifaany,aexceptions
a
PaProvidesainsufficientaguidanceatoaimplementatheastandard
a
RaWouldanotarelyaonaextensiveauseaofaprofessionalajudgment
a
RaResultsainainconsistenciesabetweenastandards
a
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