FAT week 1 - FAT Introduction Ideal Conditions(Current...

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FAT Introduction Ideal Conditions (Current value-based accounting) -> Info Asymmetry -> User Decision Problem -> Accounting Reaction -> Mediation Adverse selection -> Rational inv decision -> Decision usefulness, full disclosure -> Standard setting Moral hazard -> Motivate and evaluate manager performance -> Precise & sensitive info -> Standard setting Historical Perspective 1494 – Double entry bookkeeping system - Luca Paciolo 1800- Joint interests of firm & investors that financial info provided by firm to be trustworthy, hence laying the groundwork for development of an auditing profession & gov regulation 20 th century – Introduction of corporate income tax – Income measurement - Hatfield – persuade managers to accept amortization as deduction from income - Accounting in US relatively unregulated, with financial reporting & auditing largely voluntary 1929 – Stock market crash – Great recession – US gov created SEC by Securities Act 1934– protect investors by means of a disclosure-based structure - Act regulates dealing in securities of firms that meet certain size tests & securities traded in > 1 state (SEC responsible to ensure investors supplied with adequate info) Regulations to control disclosure would reduce monopoly power by better enabling potential entrants to identify high-profit industries Informing investors was not main motivation for disclosure. Investors were ‘protected’ by a ‘two-tiered’ market structure whereby prices were set by knowledgeable insiders, subject to a self-imposed ‘moral regulation’ to control misleading regulation. (Moral regulation not effective, major contributing factors to 1929 crash) 1934 Act = movement away from an avoidance-of-regulation rationale for disclosure towards one supplying better-quality info to investors as a way to control manipulative financial practices 1929 Crash & Great depression - Frequent appraisal of capital assets, values were fleeting, outcome: strengthening of historical cost basis of accounting (firm as going concern)
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HC -> IS shows current ‘installment’ of firm’s earning power, replaced BS as primary focus of financial reporting -> Wait to recognize revenue until objective evidence of realization is available -> Use of accruals to match realized revenues & costs of earning those revenues -> Deferral of unrealized gains & losses on BS until time to match them with revenues came Now => Mixed measurement system (HC still primary basis of accounting for important A & L class, e.g capital assets, inv, LT debt. However, if assets impaired, written down to LCM; IASB: capital assets can sometimes be written up over cost if value increased) Standard setters have moved steadily towards current cost alternatives to HC accounting over the past number of years. 2 Main current cost alternatives to HC for A& L: 1. Value-in-use (e.g. discounted PV of FCF) 2. FV (exit price/opp cost) – amount would be received should firm dispose A/L *Valuations apart from HC = CV 1965 – Concept of decision useful (replaced true) fs info - Draft joint Conceptual Framework of IASB & FASB
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  • Fall '15
  • Accounting, Net Income, Accountant, Investors

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