1.2 Introduction to Financial Reporting

As the October 2008 IASB case illustrates, the intricacies of accounting often result in differences of opinion as to what accounting methods are appropriate and the level of disclosure that should be required of companies. Arguments over appropriate accounting are facts of life because accounting involves judgment. Even in cases that don’t involve financial statement scandal or political intrigue, the management of a company is likely to have some accounting disagreements with the independent auditor before the company’s financial statements are released. If a company falters, outside analysts are sure to find accounting judgments with which, in retrospect, they disagree. If the FASB or IASB propose a new accounting rule, it is certain that some business executives will proclaim the rule to be utterly absurd. This is not because managers are sleazy, conniving, and self-serving (although such managers certainly exist); it is because the business world is a complex place filled with complex transactions, and reasonable people can disagree about how to account for those transactions. As the chapters in this book will explain in detail, accounting for the complex transactions that are commonplace today is much more than the simple “bean-counting” image portrayed of accounting in the popular press.

Your introductory accounting course gave you an overview of the primary financial statements and touched briefly on such topics as revenue recognition, depreciation, leases, pensions, deferred taxes, LIFO, and financial instruments. In intermediate accounting, all these topics are back, bigger and better than ever. Now, instead of getting an overview, you will actually get the nuts and bolts. Yes, some of these topics are complex—they are complex because the business world is a complex place. However, when you complete your course in intermediate accounting, you will be quite comfortable with a set of financial statements. In fact, you will probably find yourself skipping the statements themselves and turning directly to the really interesting reading—the notes.

Now is an exciting time to be studying accounting. Students have been learning double-entry bookkeeping for more than 500 years. Now it will be your privilege to witness the transformation of financial reporting via the twin forces of internationalization and information technology. The increased integration of the worldwide market for capital has forced diverse national accounting practices to converge towards one international standard under the banner of International Financial Reporting Standards (IFRS), with the United States being one of the last countries to continue to use its own set of standards (U.S. GAAP). This text will help you understand the “how and why” of the standard-setting process and why differences exist between U.S. GAAP and IFRS. As we are already beginning to see, the power of computers to create and analyze huge databases will change the very nature of accounting. Users will not learn about companies through a few pages of financial statements and notes but, ultimately, through online access to the raw financial data. It isn’t clear what “accounting” will entail in the technological future, but it is certain that those professionals trained in the underlying concepts of accounting and in the importance of accounting judgment and accounting estimates will be best able to make the transition. This book is intended to prepare you for the future.