Financial Accounting Theory and Analysis

Preface v

1 The Development of Accounting Theory 1

The Early History of Accounting 2

Accounting in the United States Since 1930 5

The Role of Ethics in Accounting 22

International Accounting Standards 26

Cases 27

FASB ASC Research 29

Room for Debate 29

2 The Pursuit of the Conceptual Framework 30

The Early Theorists 30

Early Authoritative and Semiauthoritative Attempts to Develop the Conceptual Framework of Accounting 32

Statement on Accounting Theory and Theory Acceptance 38

The FASB’s Conceptual Framework Project 41

International Convergence 66

Cases 74

FASB ASC Research 76

Room for Debate 77

3 International Accounting 78

International Business Accounting Issues 79

The Development of Accounting Systems 79

Preparation of Financial Statements for Foreign Users 81

The International Accounting Standards Committee 81

The Uses of International Accounting Standards 92

The IASC and the IOSCO 94

The IASB Annual Improvements Project 95

IASB–FASB Convergence 96

The Effects of International versus US GAAP Accounting Standards 97

Standards Overload 100

Framework for the Preparation and Presentation of Financial Statements 101

The IASB–FASB Financial Statement Presentation Project 110

Cases 112

FASB ASC Research 114

Room for Debate 114

4 The Status Development and Uses of Financial Reporting 115

The Financial Reporting Environment 115

Research Methodology 118

The Outcomes of Providing Accounting Information 121

The Relationship Among Accounting Research Education and Practice 147

Cases 149

FASB ASC Research 152

Room for Debate 153

5 Income Concepts Revenue Recognition and Other Methods of Reporting 154

The Nature of Income 155

Economic Versus Accounting Income 159

Revenue Recognition 161

Matching 180

Income Recognition Constraints 182

Non- GAAP Measures of Performance 183

Sustainability Reporting 186

Earnings Quality Earnings Management and Fraudulent Financial Reporting 191

International Accounting Standards 197

Cases 203

FASB ASC Research 206

Room for Debate 207

6 Financial Statement I: The Income Statement 208

The Economic Consequences of Financial Reporting 208

Income Statement Elements 208

Statement Format 210

The Value of Corporate Earnings 233

International Accounting Standards 238

Cases 243

FASB ASC Research 246

Room for Debate 246

7 Financial Statements II: The Balance Sheet and the Statement of Cash Flows 247

The Balance Sheet 247

Fair Value Measurements 259

Evaluating a Company’s Financial Position 266

The Statement of Cash Flows 269

Financial Analysis of Cash- Flow Information 279

International Accounting Standards 280

FASB ASC Research 291

Room for Debate 292

8 Working Capital 293

Development of the Working Capital Concept 293

Current Usage 295

Components of Working Capital 295

Working Capital Management 306

International Accounting Standards 314

Cases 316

FASB ASC Research 319

Room for Debate 319

9 Long- Term Assets I: Property Plant and Equipment 321

Property Plant and Equipment 321

Financial Analysis of Property Plant and Equipment 326

Cost Allocation 326

Capital and Revenue Expenditures 329

Recognition and Measurement Issues 330

Impairment of Value 330

Accounting for Asset Retirement Obligations 333

International Accounting Standards 335

Cases 341

FASB ASC Research 345

Room for Debate 346

10 Long- Term Assets II: Investments and Intangibles 347

Investments in Equity Securities 347

Investments in Debt Securities 355

Impairment of Investments in Unsecuritized Debt Including Receivables and Loans 359

The Fair Value Option for Financial Assets 363

Transfers of Financial Assets 364

Cryptocurrency 376

Financial Analysis of Investments and Intangibles 379

International Accounting Standards 379

Cases 390

FASB ASC Research 394

Room for Debate 394

11 Long- Term Liabilities 395

The Definition of Liabilities 395

Recognition and Measurement of Liabilities 396

Debt versus Equity 397

Classification of Long- Term Debt 400

Other Liability Measurement Issues 414

Reference Rate Reform 422

Troubled Debt Restructurings 424

Financial Analysis of Long- Term Debt 426

International Accounting Standards 428

Cases 437

FASB ASC Research 440

Room for Debate 441

12 Accounting for Income Taxes 442

Historical Perspective 442

The Income Tax Allocation Issue 444

Permanent and Temporary Differences 444

Conceptual Issues 448

Alternative Interperiod Tax Allocation Methods 452

Financial Statement Disclosure 460
FIN No. 48 “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” 462

The Tax Cuts and Jobs Act of 2017 463

Financial Analysis of Income Taxes 466

International Accounting Standards 469

Cases 472

FASB ASC Research 475

Room for Debate 476

13 Leases 477

Accounting for Leases 478

Subsequent Developments 489

ASU 2016- 02 (FASB ASC 842) 491

Lease Agreements Affected by ASU 2020- 04 Reference Rate Reform 502

Financial Analysis of the Effects of Capitalizing Operating Leases 503

International Accounting Standards 506

Cases 511

FASB ASC Research 516

Room for Debate 517

14 Pensions and Other Postretirement Benefits 518

Historical Perspective 520

Accounting for the Pension Fund 531

The Employee Retirement Income Security Act 531

Other Postretirement Benefits 532

Postemployment Benefits 534

SFAS No. 132 534

SFAS No. 158 534

Financial Analysis of Pension and Other Postretirement Benefits 536

International Accounting Standards 537

Cases 539

FASB ASC Research 543

Room for Debate 544

15 Equity 545

Theories of Equity 545

Definition of Equity 550

The Distinction Between Debt and Equity 551

Reporting Equity 553

Financial Analysis of Stockholders’ Equity 565

International Accounting Standards 567

Cases 569

FASB ASC Research 573

Room for Debate 574

16 Accounting for Multiple Entities 575

Business Combinations 575

Accounting for Business Combinations 576

Consolidations 582

Theories of Consolidation 589

Noncontrolling Interest 590

Drawbacks of Consolidation 593

Special Purpose Acquisition Companies 594

Segment Reporting 596

Foreign Currency Translation 601

International Accounting Standards 609

Cases 621

FASB ASC Research 624

Room for Debate 625

17 Financial Reporting Disclosure Requirements and Ethical Responsibilities 626

Recognition and Measurement Criteria 626

Areas Directly Affected by Existing FASB Standards: Supplementary Information 632

Financial Reporting: Other Means of Financial Reporting 640

All Information Useful for Investment Credit and Similar Decisions: Other Information 643

Securities and Exchange Commission Disclosure Requirements 645

Ethical Responsibilities 655

International Accounting Standards 663

Cases 666

FASB ASC Research 670

Room for Debate 670

Index I- 1