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Manual of Intermediate Accounting IFRS 2nd edition
Manual of Intermediate Accounting IFRS 2nd edition
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CHAPTER 1
Financial Reporting and Accounting Standards
ASSIGNMENT CLASSIFICATION TABLE
Topics Questions Cases
1. Global markets. 1
2. Environment of accounting. 2, 3, 4 4, 5, 7
3. Objective of financial reporting. 5, 6, 7, 8, 9, 10 2
4. Standard-setting organizations. 11, 12, 13, 14, 1, 3, 6
15, 16, 17, 18
5. Financial reporting challenges. 19, 20, 21, 22, 8, 9, 10
23, 24, 25
6. Ethical issues. 26 11, 12, 16
*7. Authoritative U.S. pronouncements 27, 28, 29, 30, 31, 13, 14, 15
and policy-setting bodies. 32, 33, 34, 35, 36,
37, 38
*These questions and cases address material in the appendix to the chapter.
Copyright © 2011 John Wiley & Sons, Inc. Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 1-1
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ASSIGNMENT CHARACTERISTICS TABLE
Level of Time
Item Description Difficulty (minutes)
CA1-1 IFRS and standard-setting. Simple 5–10
CA1-2 IFRS and standard-setting. Simple 5–10
CA1-3 Financial reporting and accounting standards. Simple 15–20
CA1-4 Financial accounting. Simple 15–20
CA1-5 Need for IASB. Simple 15–20
CA1-6 IASB role in standard-setting. Simple 15–20
CA1-7 Accounting numbers and the environment. Simple 10–15
CA1-8 Politicalization of IFRS. Complex 15–20
CA1-9 Models for setting IFRS. Simple 10–15
CA1-10 Economic consequences. Moderate 25–35
CA1-11 Rule-making Issues. Complex 20–25
CA1-12 Financial reporting pressures. Moderate 25–35
*CA1-13 GAAP terminology. Moderate 20–30
*CA1-14 Accounting organizations and documents issued. Simple 3–5
*CA1-15 Accounting pronouncements. Simple 5–7
CA1-16 GAAP and economic consequences. Moderate 25–35
1-2 Copyright © 2011 John Wiley & Sons, Inc. Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only)
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ANSWERS TO QUESTIONS
1. World markets are becoming increasingly intertwined. The tremendous variety and volume of both
exported and imported goods indicates the extensive involvement in international trade. As a
result, the move towards adoption of international financial reporting standards has and will continue
in the future.
2. Financial accounting measures, classifies, and summarizes in report form those activities and that
information which relate to the enterprise as a whole for use by parties both internal and external
to a business enterprise. Managerial accounting also measures, classifies, and summarizes in report
form enterprise activities, but the communication is for the use of internal, managerial parties, and
relates more to subsystems of the entity. Managerial accounting is management decision oriented
and directed more toward product line, division, and profit center reporting.
3. Financial statements generally refer to the four basic financial statements: statement of financial
position, income statement, statement of cash flows, and statement of changes in equity. Financial
reporting is a broader concept; it includes the basic financial statements and any other means of
communicating financial and economic data to interested external parties.
4. If a company’s financial performance is measured accurately, fairly, 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 adversely affects the securities market.
5. The objective of general purpose financial reporting is to provide financial information 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.
6. General purpose financial statements provide financial reporting information to a wide variety of
users. To be cost effective in providing this information, general purpose financial statements provide
at the least cost the most useful information possible.
7. Shareholders, creditors, suppliers, employees, and regulators all use general purpose financial
statements. The primary user group is capital providers (shareholders and creditors).
8. The proprietary perspective is not considered appropriate because this perspective generally does
not reflect a realistic view of the financial reporting environment. Instead the entity perspective
is adopted which is consistent with the present business environment where most companies
engaged in financial reporting have substance distinct from their investors.
9. The objective of financial reporting is primarily to provide information to investors interested in
assessing the company’s ability to generate net cash inflows and management’s ability to protect
and enhance the capital providers’ investments. Financial reporting should help investors assess
the amounts, timing and uncertainty of prospective cash inflows.
10. A single set of high quality accounting standards ensures adequate comparability. Investors are
able to make better investment decisions if they receive financial information from a U.S. company
that is comparable to an international competitor.
11. The two organizations involved in international standard-setting are IOSCO (International Organi-
zation of Securities Commissions) and the IASB (International Accounting Standards Board.) The
IOSCO does not set accounting standards, but ensures that the global markets can operate in an
efficient and effective manner. Conversely, the IASB’s mission is to develop a single set of high
quality, understandable and international financial reporting standards (IFRSs) for general purpose
financial statements.
Copyright © 2011 John Wiley & Sons, Inc. Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 1-3
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Questions Chapter 1 (Continued)
12. The Financial Accounting standards Board (FASB) is an independent organization whose mission
is to establish and improve standards of financial accounting and reporting for U.S. companies.
13. The purpose of the IOSCO is to facilitate cross-border cooperation, reduce global systemic risk,
protect investors, and ensure fair and efficient securities markets.
14. The mission of the IASB is to develop, in the public interest, a single set of high quality, under-
standable and international financial reporting standards (IFRSs) for general purpose financial
statements.
15. The IASB preliminary views are based on research and analysis conducted by the IASB staff.
IASB exposure drafts are issued after the Board evaluates research and public response to
preliminary views. IASB standards are issued after the Board evaluates responses to the exposure
draft.
16. IASB standards are financial accounting standards issued by the IASB and are referred to as
International Financial Reporting Standards (IFRS). The IASB Framework for financial reporting
sets forth fundamental objectives and concepts that the Board uses in developing future standards
of financial reporting. The intent of the Framework is to form a cohesive set of interrelated con-
cepts that will serve as tools for solving existing and emerging problems in a consistent manner.
17. International Financial Reporting Standards are the most authoritative, followed by International
Financial Reporting Interpretations then the IASB framework.
18. The International Financial Reporting Interpretations Committee (IFRIC) applies a principles-based
approach in providing interpretative guidance. The IFRIC issues interpretations that cover newly
identified financial reporting issues not specifically dealt with in IFRS, and issues where conflicting
interpretations have developed, or seem likely to develop in the absence of authoritative guidance.
19. 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.
20. The sources of pressure are innumerable, but the most intense and continuous pressure to change
or influence the development of IFRS come from individual companies, industry associations,
governmental agencies, practicing accountants, academicians, professional accounting organizations,
and investing public.
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Questions Chapter 1 (Continued)
21. IFRS are considered principles-based accounting. These standards provide more general guidance
by starting with broad objectives, outcomes, and principles without providing detailed guidance.
U.S. GAAP (referred to as rules-based accounting) is based on the assumption that management
needs detailed accounting guidance to ensure that the transaction is reported consistently and
appropriately.
22. Economic consequences means the impact of accounting reports on the wealth positions of issuers
and users of financial information and the decision-making behavior resulting from that impact. In
other words, accounting information impacts various users in many different ways 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 to 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.
23. No one particular proposal is expected in answer to this question. The students’ proposals, however,
should be defensible relative to the following criteria:
(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.
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 inappropriate
allocations of resources in our economy. In addition, failure to detect massive fraud can lead to
additional governmental oversight of the accounting profession.
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 difficult 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 standards, such as numerous pronouncements issued
by the IASB, to serve as guidelines for recording and processing business transactions in the
changing economic environment.
26. Accountants must perceive the moral dimensions of some situations because IFRS 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 involves awareness of
potential harm or benefit and taking responsibility for the choices.
*27. The purpose of the Securities and Exchange Commission (SEC) is to help develop and stan-
dardize financial information presented to stockholders. The SEC has broad powers to prescribe
the accounting practices and standards to be employed by companies within its jurisdiction.
*28. The Financial Accounting Standards Board’s (FASB) mission is to establish and improve stan-
dards of financial accounting and reporting for the guidance of the public, including issuers,
auditors, and users of financial information.
Copyright © 2011 John Wiley & Sons, Inc. Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 1-5
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Questions Chapter 1 (Continued)
*29. 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 recognized
as accepted practice and constitute the requirements to be followed by all business enterprises.
FASB Statements are pronouncements of the Financial Accounting Standards Board and currently
represent the accounting profession’s authoritative pronouncements on financial accounting and
reporting practices.
*30. 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 accountants as well
as other members of the business and financial community. Bulletins issued by the Committee on
Accounting Procedure, opinions rendered by the Accounting Principles Board, and statements
issued by the Financial Accounting Standards Board constitute “substantial authoritative support.”
*31. It was believed that FASB Statements would carry greater weight than APB Opinions because of
significant differences between the FASB and the APB, namely: (1) The FASB has a smaller mem-
bership of full-time compensated members; (2) the FASB has greater autonomy and increased
independence; and (3) the FASB has broader representation than the APB.
*32. The technical staff of the FASB conducts research on an identified accounting topic 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, and issues an
“exposure draft” for public comment. The preliminary views merely presents 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, revise
the draft, and vote on the issuance of a final statement.
*33. Statements of financial accounting standards constitute generally accepted accounting principles
and dictate acceptable financial accounting and reporting practices as promulgated by the FASB.
The first standards statement 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 that the
FASB intends to use as a basis for developing future standards. The concepts serve as guidelines
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.
*34. 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 statements contain a material
departure from an accounting principle promulgated by the FASB, or its predecessors, the APB
and the CAP, unless the member can demonstrate that because of unusual circumstances the
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 auditors
to follow FASB standards.
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Questions Chapter 1 (Continued)
*35. The accounting Standards Codification (or more simply, (the Codification) provides in one place all
the authoritative literature related to a particular topic. The Codification does not include nonessential
information such as redundant document summaries, basis for conclusions sections, and historical
content. It comprises all literature that is considered authoritative; all other accounting literature is
considered non-authoritative.
*36. 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 they 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 accounting
procedures in difficult situations.
In the accountants’ defense, recent legal decisions have imposed vast new liability 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 is held responsible are almost limitless.
*37. FASB Staff Positions (FSP) are used to provide interpretive guidance and to make minor amend-
ments to existing standards. The due process used to issue a FSP is the same used to issue a
new standard.
*38. The Emerging Issues Task Force often arrives at consensus conclusions on certain financial report-
ing issues. These consensus conclusions are then looked upon as GAAP by practitioners because
the SEC has indicated that it will view consensus solutions as preferred accounting and will require
persuasive justification for departing from them. Thus, at least for public companies which are sub-
ject to SEC oversight, consensus solutions developed by the Emerging Issues Task Force are
followed unless subsequently overturned by the FASB. It 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.
Copyright © 2011 John Wiley & Sons, Inc. Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 1-7
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TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 1-1 (Time 5–10 minutes)
Purpose—to provide the student with an opportunity to answer questions about IFRS and standard
setting.
CA 1-2 (Time 5–10 minutes)
Purpose—to provide the student with an opportunity to answer questions about IFRS and standard
setting.
CA 1-3 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to answer questions about IFRS and standard
setting.
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 financial statements and
financial reporting.
CA 1-5 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to evaluate the viewpoint of removing mandatory
accounting rules and allowing each company to voluntarily disclose the information it desired.
CA 1-6 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to identify the sponsoring organization of the IASB,
the method by which the IASB arrives at a decision, and the types and the purposes of documents
issued by the IASB.
CA 1-7 (Time 10–15 minutes)
Purpose—to provide the student with an opportunity to describe how reported accounting numbers
might affect an individual’s perceptions and actions.
CA 1-8 (Time 15–20 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 the environment’s
influence on accounting.
CA 1-9 (Time 10–15 minutes)
Purpose—to provide the student with an opportunity to focus on what type of rule-making environment
exists. In addition, this CA explores why user groups are interested in the nature of IFRS and why some
groups wish to issue their own rules.
CA 1-10 (Time 25–35 minutes)
Purpose—to provide the student with the opportunity to discuss the role of government officials in
accounting rule-making.
CA 1-11 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to consider the ethical dimensions of implementation
of a new accounting pronouncement.
CA 1-12 (Time 25–35 minutes)
Purpose—to provide the student with a writing assignment concerning the ethical issues related to
meeting earnings targets.
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Time and Purpose of Concepts for Analysis (Continued)
*CA 1-13 (Time 20–30 minutes)
Purpose—to provide the student with an opportunity to identify and define acronyms appearing in the
first chapter. Some are self-evident, others are not so.
*CA 1-14 (Time 3–5 minutes)
Purpose—to provide the student with an opportunity to identify the various documents issued by different
accounting organizations. This CA should help the student to better focus on the more important documents
issued in the financial reporting area.
*CA 1-15 (Time 5–7 minutes)
Purpose—to provide the student with an opportunity to match the descriptions of a number of authori-
tative pronouncements issued by rule-making bodies to the pronouncements.
CA 1-16 (Time 25–35 minutes)
Purpose—to provide the student with an opportunity to comment on a letter sent by business execu-
tives to the FASB and Congress on the accounting for derivatives.
Copyright © 2011 John Wiley & Sons, Inc. Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 1-9
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