Full and Fair Reporting

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Chapter F6
Full and Fair Reporting
Electronic Presentation by Douglas Cloud
Pepperdine University
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Objectives
1. Explain the purpose of accounting
regulation. 2. Describe how accounting standards
are established in the United States. 3. Explain
the purpose of the Financial Accounting Standards
Boards conceptual framework.
Once you have completed this chapter, you should
be able to
Continued
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Objectives
4. Identify supplementary information to the
financial statements in a corporate annual
report. 5. Describe the purpose of internal
controls and types of controls that should be
evident in business organizations.
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Objective
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Explain the purpose of accounting regulation.
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Accounting regulations protect the interests of
external decision makers by ensuring that
information for evaluating the performance and
financial condition of a business is available
and that the information is prepared according to
specific guidelines.
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What specific guidelines?
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Specific guidelines that provide assurance that
the information is reliable and comparable over
time and across companies.
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The purchaser of a corporations stock needs
assurance that the shares are reasonably priced
and represent a legitimate business.
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Sources of Accounting Regulations
The Securities Act of 1933 requires most
corporations to file registration statements
before selling stock to investors.
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Sources of Accounting Regulations
The Securities Exchange Act of 1934 requires
corporations to provide annual financial reports
to stockholders.
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Sources of Accounting Regulations
The 1934 act also created the Securities and
Exchange Commission (SEC). The SEC is
responsible for overseeing external financial
reporting for publicly traded corporations.
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The failure of a corporation to report fairly
their activities to stockholders is a major
concern in a capitalistic economy.
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Objective
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Describe how accounting standards are established
in the United States.
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Standard Setting Organizations
The Financial Accounting Standards Board (FASB)
has been the primary organization for setting
accounting standards for businesses in the U.S.
since 1973.
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Standard Setting Organizations
The Governmental Accounting Standards Board
(GASB) is a private organization that sets
standards for state and local governmental units.
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Standard Setting Organizations
The General Accounting Office is the primary
federal government agency that oversees
accounting in the federal government.
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Standard Setting Organizations
The International Accounting Standards Board
(IASB) recommends accounting standards that it
believes are appropriate for a broad range of
global activities involving companies in many
nations.
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The Standard-Setting Process
1. Accounting issues are identified and evaluated
for consideration. 2. A discussion memorandum is
issued and responses are solicited.
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The Standard-Setting Process
1. Accounting issues are identified and evaluated
for consideration. 2. A discussion memorandum is
issued and responses are solicited.
A discussion memorandum is a document that
identifies accounting issues and alternative
approaches to resolving the issue.
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The Standard-Setting Process
1. Accounting issues are identified and evaluated
for consideration. 2. A discussion memorandum is
issued and responses are solicited.
3. Public hearings are held.
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The Standard-Setting Process
1. Accounting issues are identified and evaluated
for consideration. 2. A discussion memorandum is
issued and responses are solicited.
3. Public hearings are held. 4. An exposure draft
is issued and responses are solicited.
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The Standard-Setting Process
1. Accounting issues are identified and evaluated
for consideration. 2. A discussion memorandum is
issued and responses are solicited.
3. Public hearings are held. 4. An exposure draft
is issued and responses are solicited.
An exposure draft is a document that describes a
proposed accounting standard.
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7. Existing standards are reviewed and modified
as needed.
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Objective
3
Explain the purpose of the Financial Accounting
Standards Boards conceptual framework.
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The FASBs Conceptual Framework
The FASB conceptual framework is a set of
objectives, principles, and definitions to guide
the development of new accounting standards.
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The FASBs Conceptual Framework
The FASB conceptual framework includes four major
components
1. Objectives of financial reporting 2. Qualitativ
e characteristics of accounting
information 3. Elements of financial
statements 4. Recognition and measurement in
financial statements
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The FASBs Conceptual Framework
To be relevant, information should be timely and
have predictive or feedback value.
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The FASBs Conceptual Framework
To be reliable, information should faithfully
represent economic events and should be
verifiable and neutral.
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Objective
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Identify supplementary information to the
financial statements in a corporate annual report.
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Corporate annual reports usually include

• A letter from the president or chief executive
  officer of the company

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Corporate annual reports usually include

• A description of the companys products and
  business activities

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Corporate annual reports usually include

• A summary of selected business data

Financial data, such as financial statements for
a number of years
An example of such data is shown in the next
slide.
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Exhibit 1
Summary Business Data from a Corporate Report
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Corporate annual reports usually include

• A discussion by management of the companys
  performance (MDA)

This section explains important events and
changes in performance during the years presented
in the financial statements.
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Corporate annual reports usually include

• Notes to the financial statements

Notes to financial statements describe how some
of the numbers were computed and provide
additional information about items reported on
the statements.
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Corporate annual reports usually include

• A statement of management responsibilities for
  the financial statements

Management is responsible for preparing
statements and related information that fairly
reports the business activities of a corporation.
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Corporate annual reports usually include

• An audit report

An audit involves a detailed, systematic
investigation of a companys accounting records
and procedures for the purpose of determining the
reliability of financial reports.
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Corporate annual reports usually include

• An audit report

An unqualified opinion states that the auditor
believes that the financial statements fairly
present the companys actual economic events for
the period covered by the audited statements.
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Objective
5
Describe the purpose of internal controls that
should be evident in business organizations.
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Management Philosophy
Top management should develop and enforce
policies to ensure an effective system of
internal controls.
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Business Ethics
Management should create a code of ethics and
other documents that establish company policy and
inform employees of acceptable and expected
behavior.
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Computer System Controls
Internal controls should be built into computer
information systems to protect a companys
information resources from unauthorized access,
improper use, and destruction.
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Human Resources Controls

• Hiring qualified employees who have the
  appropriate skills for a particular job.
• Conducting background checks to identify
  employees who have a history of improper
  behavior.
• Maintaining a good training program to ensure
  employee development and maintenance of skills.

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Physical Controls

• Merchandise and materials can be secured in
  warehouses or display cases.
• Merchandise can be tagged electronically to make
  shoplifting or theft difficult.
• Surveillance equipment can monitor important
  resources.
• Cash registers, vaults, and safety deposit boxes
  can be used to secure financial resources

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CHAPTER F6
THE END
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