cma part2-unit1

8/9/2019 CMA part2-unit1

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CMA

FINANCIAL ACCOUNTING

& REPORTING

PART 2


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1

UNIT 1

ACCOUNTING STANDARDS

WEIGHT RANGE IN EXAM 10% TO 15% OF

PART 2


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Introduction

Financial statements are the principal means through which financialinformation is communicated to those outside an enterprise, thesestatements provide the firms history quantified in money terms.

The objectives of financial reporting are to provide:

Information that useful in investment and credit decision

Information that is useful in assessing cash flow prospects.

Information about enterprise resources, claims to those resourcesand changes in them.

Financial accounting deal with reporting results of operations (incomeStatement )

Also, report financial position (Balance Sheet)


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Financial statements are:

Balance sheet or financial position

Statement of income or income statements Cash flow

Changes in shareholders equity

Notes to financial statements

Comprehensive income may be included


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MAIN SUBJECTS

(A) External Financial Reporting

(B) Development of Accounting Standards

(C) Annual Report(D) SEC and its Reporting Standards

(E) Public Reporting Standards

(F) Selected Disclosures in Financial Statements

(G) Reporting Issues for Multinational Companies


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A. External

Financial Reporting


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DEFINITION AND NATURE OF ACCOUNTING

Accounting organizes and summarizes economic information sothat decision makers can use it.

The information is presented reports called financial statements. To prepare those statement accountants analyze, record, quantify,

summarize and, report economic events

Accounting theory is affected and changed by social, economic,political, legal and other factors

Financial Accounting provides information for both internal andexternal parties

Financial statements (e.g balance Sheet) are the principal formalmeans through which financial information is communicated toexternal parties.


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Some information can be better reported by schedules, notes, annualreports. This reporting is called is financial reporting.


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The users of financial

statements

Direct Indirect

Has direct interest in the businessI

ndirect interest

Examples: Examples:

1) Investors or potential investors 1) Financial advisers and analysts

2) Suppliers and creditors 2) Stock markets or exchanges

3) Employees 3) Regulatory authorities

4) Management

The need of users of financial statements are diverse


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Other Classification

Internal Users External Users

Examples: Examples:- Management - Creditors

- Employees - Investors

- Board of Directors

Purpose Purpose

Control the business To know the condition of the

Business to evaluate

investment, credit, etc.


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The following diagram illustrates the relationship between Accountingand Users:

Events

Accountants

Analysis and

Recording

Financial

StatementUsers


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B. Development of Accounting Standards


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The need to develop

standards

With out agreeing on common standards and procedures the

financial statements will become useless for users. For example an accountant may record a machine at its purchasing

cost, another may record it at its market value.

The users of balance sheets will be confused and the balance sheets of

different companies can't be compared.

We need common set of standards. These common set of standards

are called generally accepted accounting principles (GAAP)


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How are the GAAP developed

and what parties participated

in the development

The accounting profession has adopted a common set of standards and

procedures called Generally Accepted Accounting Principles

(GAAP). The term means either: Authantative accounting rules - matching body has established a

principle of reporting in a given area or that over time a given

practice has been accepted as appropriate because of its universal

application.

Before the large companies come into the world (prior to 1900) thesingle owners use the financial statements to know that they have

enough cash and also use them for the internal purposes.

When the large companies come into the world a need for investment

increased. The result is the creation of stock markets.


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After the stock market crash in the year 1929 (Great Depression).

The federal government established in 1934 the Securities and

Exchange Commission (SEC) to develop standards The SEC is the federal agency.

Most companies which sell securities to the public are required to file

audited financial statements with the SEC.

The SEC encourages private bodies (AICPA, FASB) to develop

appropriate accounting standards.


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(AICPA) is the American Institute of Certified Public Accountants.

In 1939 the AICPA appointed Committee on Accounting Procedure(CAP) composed of practicing CPAs to develop standards.

The Committee on accounting procedures (CAP) issued the AccountingResearch Bulletins.

In 1959 the AICPA created the Accounting Principles Board (APB) whichissued APB Opinions.

The APB was terminated due to the lack of productivity.


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Three organizations are created after 1972:-

A- The Financial Accounting Foundation (FAF)

B- The Financial Accounting Standards Board (FASS)

C- Financial Accounting Standards Advisory Council (FASAC)

The FAF selects the members of FASB and FASAC, funds theiractivities.

The Financial Accounting Standards Advisory Council (FASAC)advises on priorities and proposed standards and evaluates the FASB's

performance. The major operating organization is the FASB.

The FASB has seven salaried members, all having extensiveexperience in Financial Accounting, with four required to be CPAS.

The mission of FASB is to establish and improve accounting standards


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Also, after the termination of Accounting Principles Board (APB) in1959 the AICPA created the Accounting Standards Executive

committee (ACSEC) to act as its official representative and reportingissues.

The main pronouncements of the ACSEC is statements of position(SOPS) on questions not addressed by the FASB.

The ACSEC also issued Practice Bulletins and Audit and Accounting

Guides.


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Summary:-

The government (Congress) gives the SEC the power to establishaccounting standards.

The SEC encourage the private sector (AICPA, FASB) to establishaccounting standards.

So, the private sector (AICPA, FASB) has the principal role in settingaccounting standards.

The standard issued by the FASB have greater support by the SEC.


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The major pronouncements

issued by FASB

Standards and interpretations

Accounting statements issued by FASB are considered generally

accepted accounting principles (GAAP)

Interpretations are modifications or extensions (by FASB) of

already existing standards.

Interpretations have the same authority as standards.

Financial Accounting Concepts

Instead of waiting to solve problem by-problem the FASB issuedStatements of Financial Accounting Concepts as part of its

conceptual framework project.

The purpose is to set in advance fundamental objectives and

concepts that the FASB will use in developing future standards.


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FASB Technical Bulletins:-

Bulletins are timely replies to questions received from public.

EmergingIssues Task Force Statements (E

ITF)

In 1984 the FASB created the EITF which is composed of 13

members representing CPA firms and preparers of financial

statements.

The purpose is how to account for new and unusual financial

transactions that have the creating differing financial reporting

practices.

Example: how to account plan termination

FAG Technical Bulletins:-

The purpose is to set in advance fundamental objectives and

concepts that the FASB will use in developing future standards.


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Summary of FASB Pronouncements

Pronouncements Authority

Standards Accounting Standards originallyissued by FASB

Considered GAAP

Interpretations The FASB modify or add somethingto an existing standard

=

FinancialAccountingConcept

Concepts issued to solve existing &emerging problems

Not consideredGAAP

Emerging issuesTask ForceStatement

Purpose is how to account forunusual transactions that may betreated in different forms.

Considered GAAP


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Cost Accounting Standards

Board (CASB)

The CASB was created by Congress in 1970 with the objective of

establishing cost accounting principles for federal defense contractorsand subcontractors.

The creation of the CASB was a response to complains about

inconsistent accounting practices of companies that had cost-plus

contracts with the government.

The standards established by the CASB are not necessarily

acceptable for financial statements reporting purposes.


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GASB establishes standards for states and local governmental entitieswith the oversight of FAF. It is the Governmental AccountingStandards Board (GASB) created in the year 1984

The GASB has issued concepts statements and interpretations ofGASB statements.

GASB has operational structure as the FASS has.

It has an advisory council called the Governmental AccountingStandards Advisory Council (GASAC). Also has staff and taskforces.

The following illustration shows the relationship between FAF,FASB and GASB:-


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Financial Accounting

Standards Board

(FASB)

Governmental

Accounting

Standards Boards

(GASB)

Staff and Task

Forces

Governmental

Accounting Standards

Advisory Council

(GASAC)

Financial

Accounting Standards

Advisory Council

(FASAC)

Financial Accounting

Foundation

(FAF)

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Federal Accounting Standards Advisory Board (FASAB)

The (FASAB) was established in 1990 by the Secretary of theTreasury, the Director of the Office of Management and Budget

(OMB), and the Comptroller General.

In 1999, the AICPA designated it as the accounting standard setterfor the federal government.

In March 2000, its statements and interpretations of federalfinancial accounting standards were recognized as officiallyestablished accounting principles for federal governmental entities.


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Parts involved in standard setting are:

1. American institute of Certified Public Accountants (AICPA)

2. FASB3. GASB (Governmental Standard Board)

4. SEC (Security and exchange Commission)

5. American Accounting Association (AAA)

6. Other bodies such as the financial exchange institute (FEI) and

National Association of Accountants (NAA)


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Congress

GASB1984 CASB

SEC

AICPA

CAP

1939

APB

1959

ASCEC

Accounting Research

Bulletins

APB

OpinionsTerminated

EITF

1984

FASB

1973

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C. ANNUAL REPORT


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The objective of the Federal security act is to providedisclosures before the initial issuance of securities. Thereforethe 1933 act is primary concerned with new issues.

The purpose of the act is to provide the investing public withcomplete and honest facts to protect them from fraudulent ormisleading statements from sellers of securities. The SEC hasthe authority to determine the accounting principles for

companies offering securities to the public.


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Reports:

Annual Report & (Form 10 - K)

Any company intends to sell its securities (e.g Shares) to the public itmust file some information with the SEC.

The purpose is to help investors to have an idea about the company'soperational and financial conditions.

This filing of information is called disclosure.

The SEC has authority to regulate financial reporting made by publiclytraded companies.

The SEC actual role is to see that companies are making disclosure(not establishing accounting standards)

To promote disclosure the SEC required that certain information mustbe included in both Form 10-K and the annual report.


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Examples of Disclosure:-

Information about the market where company sell its common stock.

Selected financial data summarized for the past 5 years. Management's discussion and analysis (MD&A) of financial conditions

and results of operations

This discussion must address liquidity, capital resources, results of

operations, and the effects of inflation and changing prices.

The MD&A need not be audited. SEC Regulation S-K provides guidelines for MD&A disclosures.


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Financial statements and supplementary data

Standardized consolidated financial statements are required. Theymust be audited and include:-

Balance sheets for the two most recent fiscal year-ends Statementsof income, cash flows, and changes in shareholders' equity for thethree most recent fiscal years

The accountant certifying the financial statements must beindependent of the management of the filing company. Theaccountant is not required to be a CPA, but (s)he must beregistered with a state.

Changes in accountants and disagreements about accounting andfinancial disclosures


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The general responsibilities

relative to the financial

reporting

Management responsibility is to:-

adopt sound accounting policies

to establish and maintain internal control.

The fairness of the financial is the responsibility of management.


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The responsibility of the

external auditor

The auditor responsibility is to express, an opinion on the financialstatements.

if he/she cannot express opinion auditor should state the reason.


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contents of Auditor Report

The contents are:-

The report shall state whether the financial statements arepresented in accordance with GAAP.

The report shall identify circumstances in which GAAP have notbeen consistently observed in the current period in relation to

the preceding period.

informative disclosures in the financial statements are to beregarded as reasonably adequate unless otherwise stated in the

report.


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D. SEC and its

Reporting Standards


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Securities exchange acts

The Acts are:

Security Act of 1993

Security Act of 1934


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The purpose of the Securities

acts (1933-1934)

Purposes are to:

Prevent fraud and misrepresentation

Ensure full and fair disclosures to help investors to evaluate

potential investment


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Difference 1933 and 1934 Acts

1933 Act regulates the initial issuance of securities i

1934 Act regulates the subsequent trading of securities.

1934 Act requires the registration of brokers, dealers and securitiesexchanges.


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Regulations the SEC made for the

purpose of making statements and

reports comply with certain

accounting standards

Regulations are:-

S - X which governs the reporting of financial statements including

footnotes and schedules. Financial statements may be

interim and annual.

S - K which governs non-financial matters e.g legal, business

Directors etc.

Financial Reporting Releases (FRRs) announce accounting and

auditing matters of general interest.

They provide explanations and clarifications of accounting and

auditing or auditing procedures used in reports filed with the SEC.


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Many Forms should be completed and

filed with SEC by a company that

intend' to issue or sell securities.

Describe the main forms

S - I which is used for a first registration of securities. (The companymakes no registration before)

S - 2 which can be used by companies that reported to the SEC for atleast 3 years.

This Form contain less information than S - I

S - 3 - This form is shorter than previous (S - I & S - 2)

f It is used for companies that meet the requirements for Form S-2 and

have at least $50,000,000 of stock held by nonaffiliates (or at least$100,000,000 with an annual trading volume of 3,000,000 or moreshares).

Form S-3 allows most information to be incorporated by reference fromother filings with the SEC.


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Securities may not be offered to the public until the registration is

effective.

The registration statement is examined by the Division of CorporationFinance.

Registration becomes effective 20 days after filing unless an

amendment is filed or the SE,""a' issues a stop order.

A preliminary prospectus is allowed that contains the same information

as a regular prospectus (price are omitted) but is clearly marked in red.Thus, it is called a red herring prospectus.


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The prospectus is part of the registration statement.

Its purpose is to provide investors with information to make an

informed investment decision. However, it usually may be presented in a more condensed or

summarized form than Form S-1.


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Form 10

used to register securities under the 1934

remember the 1934 Act apply to subsequent trade not to the new

securities.

Securities must be registered if they are traded in one of the ways

listed below.

On a national securities exchange

Over the counter if the issuer Has assets in excess of $5,000,000

and there are 500 or more shareholders An issuer may voluntarily register its securities..


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An issuer may deregister its securities if its shareholders decrease tofewer than 300 or if its shareholders are fewer than 500 and it had lessthan $1 0,000,000 in assets for each of the three most recent fiscal

year-ends. Banks must also register their securities, but they file with the

appropriate banking authority, not with the SEC.


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The required contents of Form 1 0 are

Basic information package

Other information required for Form S-1

Form 10-K

It is annual report to the SEC.

It must be filed within 90 days of corporation's year-end

It must be certified by an independent accountant It must be signed bythe following:

Principal executive, financial, and accounting officers Majority of the board of directors

Presented with the basic information package


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Form I0-Q

It must be filed (for the first three quarters) with the SEC.

This form contain unaudited Financial Statements.

Also, the financial statements should be reviewed (not audited) byindependent accountant.

This form should include, changes during the quarter (e.g a companytakes a loan from a bank)

Form 8-K The company should report to the Sec whenever material events occur

(e.g change in auditors).


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E. Public Reporting Standards


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Generally Accepted

Accounting principles (GAAP)

Generally accepted accounting principles are those principles that

have substantial authoritative support,,such as FASB Standards and

Interpretations, APB Opinions and Interpretations, AICPA AccountingResearch Bulletins, and other authoritative pronouncements.

The GAAP includes both Broad guidelines

Detailed practices and procedures

The CPA shouldn't report that the financial statements are prepared

according to GAAP if these statements contain material departure fromGAAP.


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Examples of comprehensive

bases other than GAAP

Preparing accounting on the basis of cash receipts and payments(compare with accrual accounting)

Preparing accounting on tax basis.

Prepare Accounting according to the instruction of regulation ofregulatory agency.


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House of GAAP

AICPAAccounting

Interpretations

FASBImplementation

Guides

Widely recognizedand Prevalent

industry practice

AICPA AcSEC Practice

Bulletins

FASB emerging

Issues Task Force

Category

(Least authoritative

FASB

Technical

Bulletins

AICPA Industry

Audit and

Accounting Guides

AICPA

Statement

Of Position

FASB

Standards and

Interpretations

APB

Opinions

AICPA

Accounting

Research Bulletins

Category (c)

Category (b)

Category (a)

(most authoritative)

So, you have to follow category (a) first then (b) etc.

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Types of Forms

Forms of

Registering

securities

Reporting

Annual

Forms

Interim

Reporting

Forms

Current

reporting

Forms

10-K 10-Q 8-K New

Securities

Form 10

1934 Act

S-1 S-2 S-3 Others

S-4 S-8 S-11 SB-1 SB-2

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Other Forms to register new Securities

Form Purpose SizeForm

Date of Filing Contents

S-1 Registration of new securities bynew registrant

Longer Before offeringsecurities forsale

BasicinformationpackageOther (seenotes)

S-2 Registration of new securities bya company thatregister for at least3 year

Shorterthanabove

Same as above Same asabove

S-3 Registration of

securities by acompany thatmeet S-2requirements andotherrequirements.

Shorter

than theabove

Same as above Same as

above

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Other Forms to register new Securities

Form Purpose SizeForm

Date of Filing Contents

S-4 Used for businesscombination (e.g.merger)

Simple Before offeringsecurities to theother company

BasicinformationpackageOther (seenotes)

S-8 Used for securitiesoffered toemployees

= Before offeringsecurities to theemployee

=

SB-1 Used by smallissuers to registerup to $ 10 millionof securities

= Before offeringsecurities forsales

=

S-B2 Issued by smallissuers but with nolimit

= = =

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F. Selected Disclosures in Financial

Statements


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Some disclosures should be reported

as integral parts of financial

statements. Give example?

Examples:-

All significant accounting policies should be disclosed when:

A selection has been made from existing acceptable alternatives. A policy is unique to the industry in which the entity operates.

GAAP have been applied in an unusual or innovative way.

Public companies should disclose certain minimum interim

Examples: sales, extraordinary items

Interim financial statements are not required data.

Commitments under unconditional purchase obligations should bedisclosed.


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The groups.

Other groups that have some influence on the development ofaccounting principles include:-

The American Accounting Association (AAA). Institute of ManagementAccountants ( IMA).

Financial Executives Institute (FEIN, Congress, and the InternalRevenue Service (IRS).


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THANK YOU ALL

GOOD LUCK

Yousif Eldaw

cma part2-unit1

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