Solutions For Skills for Accounting Research 4th Edition (FASB Codification & e IFRS) by Shelby Collins PDF

Preview

Summary

Solutions Manual, ebook For Skills for Accounting Research 4th Edition (FASB Codification & eIFRS) by Shelby Collins, Salzman ; 9781618533159...

Description

For All Chapters --> [email protected]

Chapter 1 Overview of Accounting Research REVIEW QUESTIONS 1. Two key objectives of performing technical accounting research are: 1. To account for transactions or items in a manner that is appropriate and supportable based on authoritative guidance, and 2. To create documentation describing the research performed and supporting the conclusion reached. 2. Parties who typically perform accounting research include: (Students to name four ) •

Corporate accountants, who are involved in the preparation of financial statements and must ensure that their financial statements are prepared in accordance with GAAP.

•

Auditors, who must review whether a company's financial statements are presented fairly in conformity with GAAP.

•

Regulators, who may need to perform research to understand positions taken in companies' financial statements.

•

Investors, who may perform research as necessary to understand accounting guidance requirements, and alternative accounting methods. 3. Ideally, accounting research should be performed before a transaction is executed because this: (Students to name three three): •

allows company management to evaluate whether the expected financial statement impacts of the transaction, as currently proposed, are acceptable

•

allows management to adjust forecasted earnings to reflect the expected impacts of the transaction

•

allows the accounting team to prepare timely documentation of the expected accounting position

•

allows the audit team to review the proposed accounting treatment before the transaction is recorded

Solutions Manual, Chapter 1

For All Chapters --> [email protected]

© Cambridge Business Publishers, 2020 1-1

For All Chapters --> [email protected]

4. It might not be possible to research the accounting for a transaction until after it has been executed if (students to name three): •

The transaction was confidential or time-sensitive,

•

The transaction could not have been anticipated (e.g., a fire),

•

The company has limited accounting resources, or

• If communication between the company’s operators and accountants failed. 5. Contemporaneous documentation means that the documentation is prepared at the same time the transaction is executed. Certain accounting elections (such as hedge accounting) require contemporaneous documentation. 6. Public companies are generally required to file financial statements with the U.S. Securities and Exchange Commission (SEC). Nonpublic (aka, private) companies are generally not required to file financial statements with the SEC but may do so in order to satisfy lenders or other stakeholders. For both public and nonpublic companies, accounting research is frequently necessary in order to ensure that the company’s financial statements are prepared in accordance with GAAP. 7. a. Standards of the GASB apply to state and local government accounting. b. Standards of the FASB apply to nongovernmental entities’ accounting. c. Standards of the AICPA apply to audits of nonpublic companies. d. Standards of the IASB apply to international companies’ accounting. e. Standards of the FASAB apply to federal government accounting. 8. In chronological order, the organizations that have historically been responsible for setting accounting standards are: •

Committee on Accounting Procedure (CAP) of the AICPA (1936-1959)

•

Accounting Principles Board (APB) of the AICPA (1959-1973)

• Financial Accounting Standards Board (FASB) (1973-present) 9. The Securities Exchange Act of 1934 (the “1934 Act”) created the SEC and gave the SEC the authority to set accounting standards. The 1934 Act was issued in response to the stock market crash of 1929 and subsequent Great Depression, which led to a crisis in investor confidence. 10. The two committees formed by the AICPA to set accounting standards were: first, the Committee on Accounting Procedure (CAP), then the Accounting Principles Board (APB). The CAP and APB were criticized for their lack of independence, their slow response time to emerging issues, and for their failure to develop a conceptual framework to guide their decisions.

© Cambridge Business Publishers, 2020 1-2

For All Chapters --> [email protected]

Skills for Accounting Research, 4th Edition

For All Chapters --> [email protected]

11. Accounting support fees are defined as the fee assessed to public companies (based on the size of their market capitalization) in order to support the operations of the FASB (and – as we’ll later discuss - the PCAOB). This funding mechanism supports the FASB’s independence, because it saves the FASB from having to rely on private or corporate donations, which could impair the objectivity of the Board. 12. The SEC has statutory (or legislative) authority to establish accounting standards but has historically delegated this authority to the private sector. That is, the Securities Exchange Act of 1934 granted the SEC the authority to set accounting standards but the SEC delegated this authority—first, to the AICPA and its committees (the CAP and APB) and now to the FASB. 13. SEC’s Division of Corporation Finance – Reviews public company financial statements and writes comment letters SEC’s Division of Enforcement – Brings civil actions against companies and individuals for violation of securities laws. 14. SEC comment letters are the result of the SEC’s Division of Corporation Finance reviewing, at least every three years, the financial statements and disclosures of all companies with publicly traded securities. In conjunction with these reviews, the SEC frequently sends comment letters to companies requesting additional explanation of a company’s financial reporting or suggesting additional disclosures. 15. The Private Company Council (PCC) was formed by the Financial Accounting Foundation (FAF) to respond to concerns that compliance with GAAP is too burdensome for nonpublic companies. The work of the PCC has already led to simplified accounting alternatives being made available within GAAP for private companies.

Solutions Manual, Chapter 1

For All Chapters --> [email protected]

© Cambridge Business Publishers, 2020 1-3

For All Chapters --> [email protected]

EXERCISES 1. For this exercise, the instructor will need to obtain real-time information to respond to (a) and (b). The response to (c) is provided below. c. It is likely important to Amazon’s management that accounting research be performed before transactions are executed, because this allows management to adjust its future earnings expectations to reflect anticipated financial statement impacts of proposed transactions. Amazon’s management may be held accountable (and even compensated) based on their ability to provide accurate short- and long-term earnings forecasts to investors. 2. Responses to this question will vary. 3. Responses to this question will vary. 4. Students will need to look for the link to “AICPA Copyrighted Standards” to access this information. Choices will vary for APB guidance. For the CAP, 3 standards are listed (students must describe 1). The status of all 3 is “superseded.” (You could go into more detail about how not all provisions have actually been superseded, some were just moved into the Codification, at which point all original standards became nonauthoritative.) •

ARB 43, Restatement and Revision of Accounting Research Bulletins—This was an interesting one. The purposes of this standard was to consolidate the 42 prior standards issued by the CAP, eliminating standards no longer deemed applicable, and condensing and clarifying guidance considered to be of value, revising some guidance, and arranging guidance by subject.

•

ARB 45, Long-Term Construction-Type Contracts—Applies to construction-type contracts of entities in the contracting business. Sets forth two accounting methods for such contracts: completed contract and percentage-of-completion.

•

ARB 51, Consolidated Financial Statements—Sets forth a general consolidation policy (e.g., that the usual condition for a controlling financial interest is ownership of a majority voting interest), and describes procedures for preparing consolidated financial statements.

5. Learning a strong research process, and gaining the ability to find answers, can prepare students to assist clients in applying GAAP to complex transactions as practitioners. EY’s Financial Accounting Advisory Services (FAAS) practice assists clients with strategic accounting and financial reporting challenges, and its professionals are “deeply versed” in technical accounting. The group provides GAAP and Financial Reporting Advisory Services, as well as transaction advisory services. The team addresses implementation of new standards, accounting policy advice, accounting for M&A activity, GAAP to IFRS conversions, and more.

© Cambridge Business Publishers, 2020 1-4

For All Chapters --> [email protected]

Skills for Accounting Research, 4th Edition

For All Chapters --> [email protected]

6. Responses to this question will vary. 7. In order to encourage the timely communication of proposed transactions, companies could (for example): •

Institute regular communications (such as a weekly meeting) between representatives of the company's operations and accounting departments to discuss transactions under consideration.

•

Require that the operations and company procurement teams alert the accounting team of all proposed material or unusual contracts. Set monetary thresholds or other checklist "triggers" to identify transactions that are material or unusual.

•

Require that accounting personnel be included in the review of any contracts involving a pre-determined list of topics. These could include contracts related to: raising capital (through the issuance of debt, equity transactions, etc), new leases, major acquisitions or new investments, etc.

•

Address this issue through improved communications not only at the operations/ground level, but also at the top/management level. That is, instill regular communications between parties at various levels of both the operating departments and Controller's group.

8. The five divisions of the SEC are: •

Division of Corporation Finance

•

Division of Trading and Markets

•

Division of Enforcement

•

Division of Investment Management

•

Division of Risk, Strategy, and Financial Innovation

The Division of Corporation Finance issues interpretive guidance to assist companies in complying with SEC reporting requirements. This guidance includes, for example, Staff Accounting Bulletins, CD&I’s (Compliance and Disclosure Interpretations), and the Financial Reporting Manual. Notably, the Division of Investment Management also issues accounting guidance targeted to investment companies, and the SEC’s Office of the Chief Accountant (OCA) issues accounting guidance, as well. Additional discussion of the SEC’s five divisions is available at the link below: https://www.sec.gov/divisions.shtml

Solutions Manual, Chapter 1

For All Chapters --> [email protected]

© Cambridge Business Publishers, 2020 1-5

For All Chapters --> [email protected]

9. The SEC's Staff Accounting Bulletin No. 99 (SAB 99) expresses the views of the staff that both qualitative and quantitative characteristics of a misstatement should be considered in assessing the materiality of the misstatement. Also an appropriate response: This SAB is codified in Topic 1 (Financial Statements), Section M (Materiality). The Codification of the SEC’s Staff Accounting Bulletins can be accessed at the following link: https://www.sec.gov/interps/account/sabcodet1.htm#M 10. Item 308 (Sec. 229.308), Internal Control over Financial Reporting, of Regulation S-K requires management to report on its internal control over financial reporting, which report shall include: (name three) •

A statement of management’s responsibility

•

Internal controls framework used

•

Management’s assessment of the effectiveness of its internal controls

•

A statement that its auditors (if applicable) have issued an attestation report over its internal controls

11. A corporate accountant (for a public company) might navigate to MD&A guidance within Regulation S-K in order to ensure that his or her company is in compliance with all required disclosures. An attestation provider may also navigate to Regulation S-K, in order to perform a review of a company’s MD&A for completeness in fulfilling Regulation S-K requirements. MD&A is not audited; however, an accountant may be engaged to perform certain attestation procedures including reviews related to a company’s MD&A (see AICPA attest standard AT 701). 12. In its enforcement action against Elizabeth Holmes and Ramesh Balwani (Litigation Release No. 24069 / March 19, 2018), the SEC charged these two individuals with defrauding investors by making false claims about the company’s technology. Specifically, the SEC charged that these individuals claimed their blood-testing technology could conduct accurate blood tests, when in fact it could not. The SEC’s mission (per About the SEC–What We Do on its website) is: “…to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” This enforcement action reflects the SEC’s mission to protect the investing public and to maintain fair markets. 13. Responses will vary.

© Cambridge Business Publishers, 2020 1-6

For All Chapters --> [email protected]

Skills for Accounting Research, 4th Edition

For All Chapters --> [email protected]

CASE STUDY QUESTIONS 1.1

1. 1.2 2

Purposeful reading: The 33-2-2- 1 assignment Responses will vary. Instructor: This assignment can be used to accompany any chapter, as it encourages students to “read, reflect, and write about” assigned readings . However, it could be most valuable in this early stage, following Chapter 1, as students haven’t yet been introduced to the research tools so aren’t yet fully ready to launch into research-related homework. Relationship B etween the FASB and SEC

1. 1.3 3

Responses to this case study will vary. Researching O riginal FASB S tandards

i

FASB Statement No. 2, Accounting for Research and Development Costs, as amended (FAS 2), par. 12 requires all research and development costs encompassed by this standard to be charged to expense when incurred. According to par. 13, entities must disclose “the total research and development costs charged to expense for each period in which an income statement is presented.” Per Appendix A, prior to the issuance of FAS 2, diversity existed in practice for how entities reported and accounted for research and development costs (par. 18). Per Appendix B, in developing this standard the Board considered 4 alternative methods of accounting for R&D costs (par. 37): a. Charge all costs to expense as incurred b. Capitalize all costs when incurred c. Capitalize costs when incurred if specified conditions are fulfilled, and charge all others to expense d. Accumulate all costs in a special category until the existence of future benefits can be determined. The Board’s ultimate position was based on: •

A desire to achieve comparability (a model that could be applied across various industries)

•

The uncertainty of ‘future economic benefits’ associated with R&D expenditures

•

The view that disclosure of these costs will offer users useful information about an entity’s R&D activities.

Solutions Manual, Chapter 1

For All Chapters --> [email protected]

© Cambridge Business Publishers, 2020 1-7

For All Chapters --> [email protected]

1. 1.4 4

Proposed Accounting Standards Updates and Comment Letters 1. The Exposure Draft (proposed ASU) Financial Instruments—Credit Losses (Subtopic 825-15), dated Dec. 20, 2012 proposed that entities measure their allowance for credit losses on financial assets on the basis of their current estimate of contractual cash flows not expected to be collected. This would remove the existing “probable” threshold for recognizing credit losses, and would cause entities to reflect their current estimate of cash flows expected to be collected on the balance sheet, with the income statement reflecting credit deterioration that had taken place during the period. 2(a-c). Responses will vary. 2(d). •

Preparers will also be concerned about the cost of complying with this standard and the requirement to reassess asset values at each reporting date.

•

Preparers may be concerned about accelerating “future” losses on assets, which losses have not yet taken place.

•

Preparers may also be concerned about the volatility this introduces to the company’s income statement.

•

Banks expressed concern about the impacts of this proposal on regulatory capital requirements.

•

Investors (financial statement users) are also concerned that recognizing “lifetime losses” upfront will cause procyclicality – that is, recognition of losses now could result in depressed values assigned to a company, thus creating a domino effect.

•

1.5

Investors are worried about income statement volatility that doesn’t match current changes to assets’ values but rather is created by expected future changes to asset values. Reviewing a Final Accounting Standards Update a. Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (June 2016) was issued in response to concerns that the current “incurred loss” model delays recognition for losses until it is probable a loss has been incurred. The view is that the current model is too slow to recognize credit losses. In some cases, this current model caused companies to delay recognition even in cases where they have information indicating that a loss is expected. This issue was highlighted during the 2007 global financial crisis, where financial statement users developed their own loss projections for companies that devalued company assets before losses were recognized. The revised model causes companies to recognize all lifetime expected losses of their financial assets in an allowance account. b. This ASU is effective for fiscal years beginning after 12/15/19, including interim periods within those years.

© Cambridge Business Publishers, 2020 1-8

For All Chapters --> [email protected]

Skills for Accounting Research, 4th Edition

For All Chapters --> [email protected]

c. Messrs. Kroeker and Smith dissented to the issuance of this ASU, because they believe that recognition of lifetime losses at inception as an expense is inconsistent with the conceptual definition of expense. They believe recognition of an expense at inception of an instrument is inconsistent with the “day 1” value of the instrument.

1. 1.6 6

Messrs. Kroeker and Smith agree that lifetime expected credit losses provide useful information but would prefer that the Board consider alternate approaches to recognizing these amounts in the income statement, such as an approach that might consider together interest income and related impairment charges. (In other words,...