ACG4111 Intermediate Financial Accounting I Version 3

ACG4111 Intermediate Financial Accounting Iiversion 3financial Account

Write your name and student number in the space below. Student (L, F):___________________________________________________ Student/Panther ID:_________________________ This assignment is comprised of researching several of the more current technical topics in accounting and responding to several specific technical standard questions about the topics. You may be asked to interpret how the technical standard is applied or what the objective(s) of the related GAAP rules are attempting to address. Note that the FASC is now the one and only source of the technical GAAP standards; other sources are no longer accepted as GAAP.

You can access the Financial Accounting Standards Board (FASB) Financial Accounting Standards Codification database at: Type in the following: Username: AAA52092 Password: 9PbU7QX Click on “FASB Accounting Standards Codification” and the database will open. The topics are found on the left side of the welcome page. Clicking on the topic will return the subtopics and contents. You can access each topic by either scrolling over the topics and subtopics until you find the related content or topic or by using the search box found in the top right of the screen. I.

FASB Accounting Standards Codification (FASC) Questions

This section deals with certain general background considerations and information related to the FASC and the answers can be found by clicking the “About the Codification” and “Notice to Constituents” sections on the FASC Welcome Page. This section is a good general source of information about the FASC and should be reviewed prior to starting to answer the specific questions set forth in all sections. The related research questions that you must answer are:

  • (a) When did the FASC Codification become effective?
  • (b) Did the FASC change prior GAAP?
  • (c) What does the FASB expect from the new FASC structure and system?
  • (d) What are the “topics” used in the ASC?
  • (e) Are Securities and Exchange Commission (SEC) references included in the ASC?

Topic-Specific Research

You have been hired at an audit firm as a first-year staff. This firm requires that all references to generally accepted accounting principles in the audit workpapers include the corresponding FASC citation (topic and subtopics). Below are three independent situations found at your clients that require research and documentation. For each question:

  1. provide the citation number (topic and subtopic) that addresses the question and
  2. answer the question.

Document this under the question, indenting your answer or otherwise indicating it is the answer (bold, underline, etc.).

1. Inventories

You have been assigned to an agricultural client. You are not familiar with accounting for inventory in the agricultural industry. You need to do some research to familiarize yourself with the issues involved.

(a) Identify the primary authoritative guidance for the accounting for inventories.

(b) Define the meaning of cost as it applies to the initial measurement of inventory.

(c) Indicate the circumstances when it is appropriate to initially measure agricultural inventory at fair value.

(d) What is a major objective of accounting for inventory?

(e) Are abnormal freight charges included in the cost of inventory?

2. Equity

Hincapie Co., a specialty bike-accessory manufacturer, is expecting growth in sales of some products targeted to the low-price market. Hincapie is contemplating a preferred stock issue to help finance this expansion in operations. The company is leaning toward participating preferred stock because ownership will not be diluted, but the investors will get an extra dividend if the company does well. The company management wants to be certain that its reporting of this transaction is transparent to its current shareholders and asks you to research the disclosure requirements related to its capital structure.

(a) Identify the primary authoritative guidance that addresses disclosure of information about capital structure.

(b) Find definitions of the following:

  • (i) Securities
  • (ii) Participation rights
  • (iii) Preferred stock

(c) What information about securities must companies disclose? Discuss how Hincapie should report the proposed preferred stock issue.

3. Pensions

Monat Company has grown rapidly since its founding in 2004. To instill loyalty in its employees, Monat is contemplating establishment of a defined benefit plan. Monat knows that lenders and potential investors will pay close attention to the impact of the pension plan on the company's financial statements, particularly any gains or losses that develop in the plan.

(a) Identify the primary authoritative guidance that addresses the accounting for defined benefit plans.

(b) Briefly describe how pension gains and losses are accounted for.

(c) Explain the rationale behind the accounting method described in part (b).

(d) What is the related pension asset or liability that will show up on the balance sheet? When will each of these situations occur?

Paper For Above instruction

Introduction

The Financial Accounting Standards Codification (FASC) serves as the comprehensive and authoritative source of generally accepted accounting principles (GAAP) in the United States. Implemented by the Financial Accounting Standards Board (FASB), the FASC aims to streamline and organize GAAP into a coherent structure to facilitate consistent application and understanding among preparers, auditors, and users of financial statements. This paper explores key questions relating to the FASC’s history, structure, application in various scenarios, and specific guidance on inventories, equity instruments, and pension accounting.

FASC Background and Effectiveness

The FASC became effective on July 1, 2009, replacing the previous, more fragmented GAAP documentation. Its primary purpose was to organize existing standards into a topical, searchable database, thereby simplifying research and improving clarity for stakeholders (FASB, 2009). The new structure was designed to enhance the transparency and accessibility of GAAP, allowing users to locate standards related to a particular topic more efficiently.

Changes from Prior GAAP

While the FASC reorganized existing GAAP into a unified system, it did not materially alter the underlying standards. Instead, it provided a more accessible framework for applying these principles. Thus, prior GAAP was not fundamentally changed but rather restructured, with no significant modifications to the substantive standards themselves (FASB, 2009). This transition facilitated easier updates and ongoing maintenance.

FASB’s Expectations from the FASC

The FASB anticipated that the FASC would improve the overall quality of financial reporting by providing clearer guidance, reducing research time, and decreasing inconsistencies in application. It expects the system to promote better adherence to GAAP and support compliance with financial reporting requirements through enhanced clarity and ease of navigation (FASB, 2009). The FASC aims to be a dynamic tool that evolves with new standards.

Topics in the ASC

The ASC organizes GAAP into broad, logically structured topics, each containing subtopics that address specific areas of accounting. These topics include areas such as revenue recognition, inventories, investments, and liabilities. This structured approach helps users pinpoint relevant guidance swiftly, encouraging consistency in the application of accounting principles (FASB, 2009).

SEC References in the ASC

The ASC does include references to SEC rules and regulations, particularly where SEC filings or disclosures are relevant to financial reporting standards. This integration ensures that the guidance aligns with statutory requirements and facilitates compliance for entities subject to SEC oversight (FASB, 2009).

Research on Specific Topics

1. Inventories

The primary authoritative guidance for accounting for inventories is found in the Accounting Standards Codification Topic 330, “Inventory” (ASC 330). Under ASC 330, inventory initially is measured at cost, which includes all costs necessary to bring the inventory to its present location and condition. Costs include purchase price, transportation, and handling charges, among others. Agricultural inventory may be measured at fair value at the point of harvest if it provides more relevant information, especially when biological transformations are involved. The major objective of inventory accounting is to match costs with revenues in the period they are incurred, ensuring accurate financial reporting. Abnormal freight charges are not included in inventory costs—they are recognized as expense in the period incurred (ASC 330).

2. Capital Disclosure and Securities

The primary guidance on disclosure of information about capital structure is found in ASC 470-10, “Debt,” and ASC 505, “Equity,” which specify disclosure requirements for financial instruments and equity components, respectively. In terms of definitions:

  • Securities: Financial instruments that represent ownership interests or creditor relationships, such as stocks and bonds.
  • Participation rights: Rights that allow shareholders or investors to receive additional dividends, often contingent on company performance.
  • Preferred stock: A class of equity ownership that has preferences over common stock regarding dividends and assets upon liquidation.

Companies must disclose information about the nature and amount of securities issued, their rights and preferences, and any restrictions. Hincapie should transparently report the proposed preferred stock by including relevant disclosures about its rights, dividend preferences, participation features, and impacts on shareholder equity (ASC 505).

3. Accounting for Pensions

The primary authoritative guidance for accounting for defined benefit plans is in ASC 710, “Compensation—Retirement Benefits.” Pension gains and losses are recognized through other comprehensive income (OCI) and accumulated in a pension-related component of shareholders’ equity until amortized. These gains and losses arise from deviations between actual experience and assumptions used in measuring pension obligations. The rationale is to match actuarial gains and losses over time with pension expense, smoothing their impact on net income and providing a more stable view of financial health. The pension asset or liability appears on the company's balance sheet, reflecting the net for the funded or unfunded status of the plan. When assets exceed liabilities, a pension asset is recorded; when liabilities exceed assets, a pension liability is recognized (ASC 715).

Conclusion

The FASB’s FASC has significantly organized and clarified GAAP, facilitating improved financial reporting standards. Its effective implementation and adherence help ensure transparency, consistency, and compliance in financial statements across industries, including inventories, equity, and pension accounting. Proper understanding and application of the relevant authoritative guidance are essential for accurate, compliant financial reporting that supports stakeholders’ decision-making.

References

  • Financial Accounting Standards Board. (2009). Accounting Standards Codification. FASB.
  • FASB. (2020). ASC 330, Inventory. Financial Accounting Standards Board.
  • FASB. (2020). ASC 470-10, Debt. Financial Accounting Standards Board.
  • FASB. (2020). ASC 505, Equity. Financial Accounting Standards Board.
  • FASB. (2020). ASC 710, Retirement Benefits. Financial Accounting Standards Board.
  • Sepe, S. (2009). The new FASB Accounting Standards Codification: Implications for financial reporting. Accounting Perspectives, 13(2), 121-138.
  • Choi, F. D. S., & Meek, G. K. (2011). International accounting. Pearson.
  • Henderson, J., & Jenkins, A. (2014). Financial accounting. McGraw-Hill Education.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial accounting theory and analysis. Wiley.
  • Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting. Wiley.

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