3. The concept of too big to fail first distributed in 1984 with the failure of continent Illinois bank? Give an example today of who is ‘Too big to fail’ and why?

Case 1-3 Politicalization of Accounting Standards

Some accountants have said that politicalization in the development and

acceptance of generally accepted accounting principles (i.e., standard setting) is

taking place. Some use the term politicalization in a narrow sense to mean the

influence by governmental agencies, particularly the SEC, on the development of

generally accepted accounting principles. Others use it more broadly to mean the

compromising that takes place in bodies responsible for developing these principles

because of the influence and pressure of interested groups (SEC, American

Accounting Association, businesses through their various organizations, Institute

of Management Accountants, financial analysts, bankers, lawyers, etc.).

Required:

A.) Do the reasons these groups were formed, their methods of operation while in existence, and the reasons for the demise of the first two indicate an increasing politicalization (as the term is used in the broad sense) of accounting standard setting? Explain your answer by indicating how the CAP, APB, and FASB operated or operate. Cite specific developments that tend to support your answer.

CAP. The Committee on Accounting Procedure, CAP, which was in existence from 1939 to 1959, was a natural outgrowth of AICPA committees which were in existence during the period 1933 to 1938. The committee was formed in direct response to the criticism received by the accounting profession during the financial crisis of 1929 and the years thereafter. The authorization to issue pronouncements on matters of accounting principles and procedures was based on the belief that the AICPA had the responsibility to establish practices that would become generally accepted by the profession and by corporate management.

As a general rule, the CAP directed its attention, almost entirely, to resolving specific accounting problems and topics rather than to the development of generally accepted accounting principles. The committee voted on the acceptance of specific Accounting Research Bulletins published by the committee. A two-thirds majority was required to issue a particular research bulletin. The CAP did not have the authority to require acceptance of the issued bulletins by the general membership of the AICPA, but rather received its authority only upon general acceptance of the pronouncement by the members. That is, the bulletins set forth normative accounting procedures that "should be" followed by the accounting profession, but were not "required" to be followed.

It was not until well after the demise of the CAP, in 1964, that the Council of the AICPA adopted recommendations that departures from effective CAP Bulletins should be disclosed in financial statements or in audit reports of members of the AICPA. The demise of the CAP could probably be traced to four distinct factors: (1) the narrow nature of the subjects covered by the bulletins issued by the CAP, (2) the lack of any theoretical groundwork in establishing the procedures presented in the bulletins, (3) the lack of any real authority by the CAP in prescribing adherence to the procedures described by the bulletins, and (4) the lack of any formal representation on the CAP of interest groups such as corporate managers, governmental agencies, and security analysts.

APB. The objectives of the APB were formulated mainly to correct the deficiencies of the CAP as described above. The APB was thus charged with the responsibility of developing written expression of generally accepted accounting principles through consideration of the research done by other members of the AICPA in preparing Accounting Research Studies. The committee was in turn given substantial authoritative standing in that all opinions of the APB were to constitute substantial authoritative support for generally accepted accounting principles. If an individual member of the AICPA decided that a principle or procedure outside of the official pronouncements of the APB had substantial authoritative support, the member had to disclose the departure from the official APB opinion in the financial statements of the firm in question.

The membership of the committee comprising the APB was also extended to include representation from industry, government, and academe. The opinions were also designed to include minority dissents by members of the board. Exposure drafts of the proposed opinions were readily distributed.

The demise of the APB occurred primarily because the purposes for which it was created were not being accomplished. Broad generally accepted accounting principles were not being developed. The research studies supposedly being undertaken in support of subsequent opinions to be expressed by the APB were often ignored. The committee in essence became a simple extension of the original CAP in that only very specific problem areas were being addressed. Interest groups outside of the accounting profession questioned the appropriateness and desirability of having the AICPA directly responsible for the establishment of GAAP. Politicization of the establishment of GAAP had become a reality because of the far-reaching effects involved in the questions being resolved.

FASB. The formal organization of the FASB represents an attempt to vest the responsibility of establishing GAAP in an organization representing the diverse interest groups affected by the use of GAAP. The FASB is independent of the AICPA. It is independent, in fact, of any private or governmental organization. Individual CPAs, firms of CPAs, accounting educators, and representatives of private industry will now have an opportunity to make known their views to the FASB through their membership on the Board. Independence is facilitated through the funding of the organization and payment of the members of the Board. Full-time members are paid by the organization and the organization itself is funded solely through contributions. Thus, no one interest group has a vested interest in the FASB.

Conclusion. The evolution of the current FASB certainly does represent "increasing politicization of accounting standards setting." Many of the efforts extended by the AICPA can be directly attributed to the desire to satisfy the interests of many groups within our society. The FASB represents, perhaps, just another step in this evolutionary process.

B.) What arguments can be raised to support the politicalization of accounting standard setting?

all stakeholders who have fallen victim to corporate fraud would be in support of policalitzation of accounting standard setting

After the collapse of corporate giants who defrauded their employees, lenders, the government and other stakeholders, the SEC was forced to create greater restrictions and improved policies, including the full disclosure principle, to protect stakeholders.Fines, penalties, and even jail time were handed down to the directors of many of these companies, for many employees who lost their hard earned pensions, and investors who lost their life savings

C.) What arguments can be raised against the politicalization of accounting standard setting?(CMA adapted)

People who’ve always prepared their financial information using fair judgment who are now forced to comply with a lengthy list of regulatory rules and guidelines

many cannot afford to hire accounting professionals to ensure they are in compliance with newly revised standards and policies owing to financial hardships

Because of the illegal acts of businesses in the past, stricter standard setting has burdened all publicly traded companies.

Case 1-6 Accounting in crisis

During the early 2000s, the role of accounting and the auditing profession changed and several accounting scandals were uncovered.

(a.) What conditions caused accounting and the audit profession role to change during this time?

There were several conditions which lead to change the roles of accounting & auditing professionals during this time. So let’s know some major conditions which caused changes in the role of accounting and auditing professionals;

1. Some major accounting scandals took place during this time period like; Enron case, WorldCom and Tyco etc. Thus due to these accounting scandals changes in the roles of accounting and auditing professionals became necessary.

2. Due to major scandals, investors have lost their trust in the market hence for making trust of the investors back into market some changes became necessary.

3. Various stakeholders lost their trust in old accounting & auditing process hence for making these accounting and auditing work more reliable we need some solid changes in the role of these professionals.

4. For making, accounting and auditing work more reliable & independent these changes in the role took place.

(b.) What major changes occurred as a result of the accounting scandals at that time?

Following major changes occurred as a result of the accounting scandals at that time;

1. Use of information technology became a vital factor because it assumed that more and more use of technology will bring fair practices. So this change occurred as a result of accounting scandals.

2. Various vital changes were made in accounting standards for accounting recording and for auditing work as well.

3. Public accounting firms were prohibited to do more & more advertising about their services & work.

4. Profit structure of the CPA firms also changed due to the accounting scandals at that time.

5. Due to these accounting scandals, CPA firms started working more efficiently & effectively so that overall costs of the operations can be minimized and clients can be offered lower prices for the services.

Case 2-2 The Theoretical Foundation of Accounting Principles During the past several years, the FASB has attempted to strengthen the theoretical foundation for the development of accounting principles. Two of the most important results of this attempt are the Conceptual Framework Project and the Emerging Issues Task Force. During this same period, the FASB has been criticized for imposing too many standards on the fi nancial reporting process, the so-called standards overload problem. Required:

a. Discuss the goals and objectives of

i. the Conceptual Framework Project

The Conceptual Framework Project seeks to revise the Conceptual Framework, setting the standards for financial reporting in the industry. The goals and objectives of the project are to answer a series of questions that will have a profound impact on financial reporting. These include the clarification of the objective of financial reporting, and if financial statements should be prepared from an entity or proprietor perspective. It will detail what are the most important characteristics of accounting information, as well as what is an asset and a liability. The project will discuss whether or not all assets or liabilities be recorded irrespective of the probability that they may be realized or paid, and if matching principle is dead. It also looks to answer if the revenue-recognition principle will survive, or be replaced by the asset-liability view, as well as if an asset should be measured at cost or fair value. Lastly, the project hopes to clarify if "depreciation an outdated concept tied to the matching principle, or is it a legitimate valuation technique"

ii.The Emerging Issues Task Force

The Emerging Issues Task Force (EITF) was formed in 1984, as a response to the FASB's task force recommendations regarding the need for timely financial reporting guidance. As the FASB states, in their Emerging Issues Task Force (n.d.) document, the EITF's primary objective is to become aware of emerging issues, in the industry, before they become widespread, and before divergent practices regarding these issues become entrenched.

b.Discuss the standards overload problem.

The standard overload problem (SOP) is a concern about having too many accounting standards, such as the accounting community including American Institute of Certified Public Accountants (AICPA), Securities and Exchange Commission (SEC), and the FASB.The SOP centers on small businesses that have problems with the standards because of the lack of resources that they can research and the implementation of the ongoing pronouncements. There is no requirement for small businesses to follow the requirements of Generally Accepting AccountingPrinciples (GAAP) with the financial statements that are needed. There are two concerns about the standard overload problem that is that not all GAAP principles concern small businesses when it comes to the financial statements.The second is when the GAAP principles are relevant;they are frequently interrupted with the cost benefits.

Case 2-5 Definition of Assets

your company owns a building that is fully paid for. Explain how the building meets the definition of an asset under each of the following scenarios.

a. your company is using the building as a plant that is producing automobiles.

· The building is a resource that acts as a fixed asset. It facilitates the production activities that help organization to generate revenues and earn profit.

· A) If company is using the building as a plant that is producing automobiles then plant is also a fixed asset. The nature of fixed asset is of capital nature which means that will give us the benefit for more then one year i.e. for long period.

b. your company is not using the building but plans to sell it. Explain how the building meets the definition of an asset.

· At present, the building is an unused resource. The sale of the building will generate cash that will be used to accelerate / initiate production activities and the organization generates revenue and earn profit.

· B) If company is not using the building but plans to sell it then there is two cases i) in the first case if selling and purchasing builiding is the business of the company then it is not an asset. It will be considered as stock. ii) In the other case if company bought the building for the purpose of investment then it will be considered as fixed asset.

c. your company is not using the building but plans to remodel it so that it can be used as a plant to produce automobiles.

· The building is unused today. But, it has value and it can be used after remodeling as per the requirements. Then, a firm can generate revenues and earn profit.

· C) If company is not using the building but plans to remodel it so that is can be used as a plant to produce automobiles then it will be considered as fixed asset and amount expensed on the remodel of the building will also be added to the value of the builiding. Building is giving us benefit for long term then it will be considered as an asset.

Case 17-4 Preparation of Footnotes

You have completed your audit of Carter Corporation and its consolidated subsidiaries for the year ended December 31, 2017, and are satisfied with the results of your examination. You have examined the financial statement of Cater for the past three years. The corporation is now preparing its annual report to shareholders. The report will include the consolidated financial statements of Carter and its subsidiaries and your short-form auditor’s report. During your audit, the following matters came to your attention.

1. The Internal Revenue Service, which is examining the corporation s 2017 federal income tax return, questions the amount of a deduction claimed by the corporation s domestic subsidiary for a loss sustained in 2017. The examination is still in process, and any additional tax liability is indeterminable at this time. The corporation s tax counsel believes that there will be no substantial additional tax liability.

2. A vice president who is also a stockholder resigned on December 31, 2016, after an argument with the president. The vice president is soliciting proxies from stockholders and expects to obtain sufficient proxies to gain control of the board of directors so that a new president will be appointed. The president plans to have a footnote prepared that would include information about the pending proxy fight, management s accomplishments over the years, and an appeal by management for the support of stockholders.

Required:

A. Prepare the footnotes, if any, that you would suggest for the foregoing listed items.

B. State your reason for not making disclosure by footnote for each of the listed items for which you did not prepare a footnote.

Case 17-4 The Ethics of Accounting Choices

The Fillups Company has been in the business of exploring for oil reserves. During 2017, $10 million was spent drilling wells that were dry holes. Under U.S. GAAP, Fillups has the option of accounting for these costs by the successful efforts method or the full‐cost method. Under successful efforts, the $10 million would be expensed once it was determined that the wells were dry. Under full cost, the $10 million would be capitalized. It would not be expensed until the oil from successful wells is extracted and sold. Fillups decides to use the full‐cost method because of its positive effect on the bottom line.

Required:

a. What are the ethical considerations implied in the rationale for Fillups s decision? Explain.

a. According to accounting ethics and code of conduct, The expenses are capitalised by the Fill ups company which is against accounting standards (US GAAP) as well as ethics because the expenses are incurred on dry wells, not oil wells. The capitalisation is relevant if drilling is done in oil wells, not dry wells. For, Dry Wells, The successful effort method is the appropriate one.

b. Do you believe that an accounting alternative should be selected solely on the basis of financial statement effects? Discuss.

B.Yes, the choice of the method has huge impact on financial statements in the following manner. The capitalisation of expenses will lead to:-

> Increase in the net income of the company ( Capitalising the expenses and showing them over a period of time will lead to income enhancement)

> Impact on the balance sheet: The expenses will be treated on the asset side.

> Impact on retained earnings: In the long term, there will be less retained earnings as well as shareholder equity.

> Impact on cash flows: Increase in cash flow from operating activities and less from investment activities.