Applied Research in Financial Reporting: Text and Cases

1. Applied Research in Financial Reporting: Text and Cases Chapter 4 Authoritative Sources of Information

2. Authoritative Sources of Literature GAAP Hierarchy Indices, Data Bases and Search Engines Manual Indices Electronic Data Bases Search Engines The Internet Searching the Web Electronic Sources for Accounting Research FARS Others Search Guidelines Authoritative Sources of Information

3. Authoritative Sources of Literature • Primary publications of Promulgatory Organizations • Statements on Financial Accounting Standards • Interpretations • Technical Bulletins • Implementation Guides • Emerging Issues Task Force Positions • Also, ARBs, APBs, SOPs, Practice Bulletins, Accounting and Auditing Guides, Industry Checklists (all available from the AICPA) if not superseded

4. Authoritative Sources of Literature • Primary publications of Regulatory Organizations such as SEC’s: • Financial Reporting Releases • Staff Accounting Bulletins • Accounting and Auditing Enforcement Releases • Concept and Interpretive Releases

5. Authoritative Sources of Literature • Publications from Private Sources such as: • Standards and Poor’s publications • Journals and research reports (see Appendix A) • CPA Societies publications such as the CPA Journal • Academic publications such as the publications of the American Accounting Association • Accounting Horizons and other journals

6. Authoritative Sources of Literature • GAAP Hierarchy • Sufficiency of evidence • Sufficiency of synthesis • Sufficiency of analysis • matters of professional judgment and due professional care • Quality evidence needs a GAAP Hierarchy • SAS 69 provides this hierarchy (Exhibit 3-1 next slide)

7. Exhibit 4-1

8. Major Issue of Authority • Whether or not the pronouncement has been exposed to public comment: • Levels 1-3 are • Levels 4-5 generally are not

9. Indices, Data Bases and Search Engines • Manual Indices • Accounting and Auditing Standards • Accounting Standards, Current Text. This is a loose-leaf publication of the FASB. It is updated as new standards are issued. Thus, it provides current financial accounting standards. It is organized by subject. • AICPA Professional Standards. Current Statements on Auditing Standards issued by the Auditing Standards Board of the AICPA. It is organized by topic. • Audit and Accounting Manual. AICPA’s practice aids • Audit and Accounting Guides. AICPA’s general and industry guides for specific accounting and auditing issues. • EITF Abstracts. This is a loose-leaf publication of the FASB. It provides the Emerging Issues Task Force summaries..

10. Indices, Data Bases and Search Engines • Manual Indices: • Annual Reports and Financial Ratios • Accounting Trends and Techniques. AICPA’s annual survey of companies concerning their accounting practices, alternative accounting methods used, and types of disclosure. • Annual Statements Studies. Robert Morris Associates’ five-year comparative ratios for over 300 industries. • Industry Norms and Key Business Ratios. Dun & Brad Street’s five-year comparative ratios for over 800 industries.

11. Indices, Data Bases and Search Engines • Manual Indices: • International Accounting • Doing Business in ... These are booklets published by accounting firms such as Ernst and Young and PriceWaterhouseCoopers on various countries around the world. They cover accounting, auditing, tax, and legal issues for doing business in the country covered in the booklet. • Professional Accounting in Foreign Countries. AICPA’s publication discussing major international accounting and auditing issues. • Various Dictionaries, Handbooks and Textbooks • Numerous entries here. Examples are Accountant’s Handbookand Handbook for Accounting and Auditing. They provide information on standard setting organizations, presentation and analysis of financial reports, specialized accounting for various industries, etc.

12. Electronic Data BasesAnd Search Engines • Practically unlimited sources are stored and indexed in these data bases (also called info bases) • Powerful dynamic search engines as compared with the old static hard copy indices • At least the abstract of the article or the pronouncement, and in many cases the text of the full document

13. Electronic DatabasesAnd Search Engines • Retrieval is not very easy and needs multiple criteria: • Requisite accounting knowledge is needed • Professional judgment • GAAP hierarchy • This problem presents business opportunities for accountants

14. The Internet • A virtual network of computers across the World • A result of US Defense Advanced Research Project Agency research • Each computer is connected to an internal server or external service such as AOL • The servers are connected to each other in the world wide web or www.

15. The Internet • An internet address is called a URL (Unique Resource Locator) • It identifies the unique address and domain (e.g., edu for educational institutions) • A web site can be a gateway to many other web sites through links • For example, www.Rutgers.edu/Accounting/raw.htm is a gateway.

16. Searching the Web • Electronic searches can be tedious due to: • the volume of information • variety of web site designs • Slow peak use time • A lot of junk

17. Searching the Web • Guidelines to search the Web: • Good search strategy • Clear ideas about the information sought • Search engines are not created equal (some specialize in areas such as company information) • Assess the reliability of the information on the site (purpose, source, style, and content) • Look for good organization and easy navigational tools

18. Searching the Web • Guidelines to search the Web: • Assess the reliability of the content for • Accuracy • Comprehensiveness • Currency • Security/Integrity

19. Searching the Webfor Accounting Literature • Dedicated infobases and search engines: • Accounting and Auditing Standards (Domestic and International): • Accounting Firms Data Bases. Major international accounting firms have developed professional literature data bases for the use of their professionals. These data bases are generally available to the public at a fee (i.e., you must receive a user name and a password to use them. An example is Arthur Andersen’s Accounting Research Manager. It is available at www.arm.arthurandersen.com. • FARS Data Base (www.FASB.org). This is Financial Accounting Research System (FARS) and it is published by the FASB. It is currently available on a CD and is updated quarterly. It provides access to the FASB’s and the AICPA’s original pronouncements, the Current Text, EITF, FASB’s questions and answers (Q&A), and more. • ProQuest (www.ProQuest.umi.com). Provides access and search of various data bases such as ABI/Inform Global, Accounting and Tax (newspapers and periodicals). Key word search results in a listing of articles form newspapers and periodicals that provide at least abstracts and in many cases the full text of the article. ABI/Inform also provides information on over 6,000 companies world-wide updated at least monthly.

20. Searching the Webfor Accounting Literature • Dedicated infobases and search engines: • Annual Reports and Financial Ratios • Bloomberg (www.Bloomberg.com). Financial ratios, market data, and economic and political information in various market sectors. Can print screens, but can not download information to files. • Disclosure’s Global Access (www.disclosure.com). Market data and company financial statements, but read and print only pdf files. • EDGAR (www.SEC.gov). Securities and Exchange Commission’s Electronic Data Gathering and retrieval System (EDGAR). Provides a data base in which company filings (e.g., 10-K reports) are available for public use. Use PriceWaterhouseCoopers’ edgarscan (http://bamboo.tc.pw.com) to access EDGAR and download files onto Excel spreadsheet program. • Lexis Universe Financial Information (www.Lexis-Nexis.com). Full text of annual reports that can be copied and pasted onto other programs (e.g., word processors). • Market Guide Database (www.marketguide.com). Annual reports, financial ratios, and stock market information. Can be downloaded to Excel spreadsheet program.

21. Searching the Webfor Accounting Literature • Dedicated infobases and search engines: • Gateways (Numerous useful entries here. Examples are): • Accounting/Auditing/tax (www.taxsites.com) This site provides links to hundreds of sites organized by accounting, auditing, and tax. • Information for accounting students (www.accountingstudents.com). This site is useful for searches on various issues of interest to accounting students ranging from links to accounting firms’ web sites and information for professional contact and research. • Rutgers University (www.Rutgers.edu/Accounting/raw.htm). This site provides links to many sites ranging from the FASB to the directory of accounting faculty world-wide.

22. Nature of These Data Bases • Some have extensive coverage well beyond accounting (e.g., Lexis Academic Universe) • Others are very specialized (e.g., FARS) • Others are somewhere in between (e.g., AA’s Research Manager)

23. Examples of How To Search • FARS Data Base: • FASB-OP---Original Pronouncements: contains all AICPA and FASB pronouncements in chronological order including totally superseded pronouncements; • FASB-CT----Current Text: contains the General Standards, Industry Standards, and the Current Text sections that have been superseded but are still applicable due to a delayed effective date; • EITF---Emerging Issues Task Force: includes the full text of each abstract for every issue discussed by the Emerging Issues Task Force since its inception in 1984 • FASB-Q&A---Staff Implementation Guides: contains staff Special Reports and other published implementation guidance. This guidance is for several specific FASB statements, including statements on future contracts, computer software and so on. • FASINDEX: contains the combined topical index for all above databases in FARS.

24. Examples of How To Search • FARS Data Base: • Use the Query command for search:

25. Limiting and Expanding Operators • Limiting Operators • AND (or the symbol & but not the lower case and) is used to look for the word before and after it. Thus, a search for account AND receivable looks for account and receivable. It finds only passages where account and receivable are found somewhere in the passage. • If you want the two words to be found in an exact order, then use quotation marks around the words in the order you want. For example, “account receivable” indicates that you are looking for “account receivable,” but not for “receivable account.” • If you want to find “account receivable” but you don’t mind if they are located within n (say 10) words from each other, then specify “account receivable”/n. Also if you are looking for “account receivable” or “receivableaccount” within n words, you can specify “account receivable”@n. • If you want to find one of the terms but not in combination with the other you can use the NOT (or the symbol ^ but not the lower case not) operator. For example, receivable NOT account will find all passages in which receivable appears but not in combination with account.

26. Limiting and Expanding Operators • Expanding Operators: • OR (also the symbol | but not the lower case or) operator is used to search for all passages that contain a word or another. For example, The search for receivable OR account will find all passages that have either account or receivable words in it. • If you want to find all the passages that have both words except when they are together, then use the exclusive XOR (also the symbol ~ but not the lower case xor). This search will find all receivable and account words, but not receivableaccount or account receivable. • If you want to find all variations of a key word, then use an asterisk (*) at the end of the word. For example, account* will locate account, accounting, accountant.

27. Case Illustration Bell Technologies, Inc. Literature Search from FARS

28. Bell Technologies, Inc. • Facts: • Closely held, 52% owned by Joseph Bell • Sold distribution rights to Hesser Systems for $1,000,000, receives $100,000 per quarter beginning on 2/1/20X2 -- oral agreement • Prime rate 10% (recent credit line: prime plus 2) • Hesser is a major customer (70% of sales in year ending 12/31/20X1)

29. Bell Technologies, Inc. Objectives and Key words • Timing of Revenue Recognition and the Installment Method • Keywords: Revenue recognition (97 hits) AND installment (3 hits), • APB Opinion No. 10, “Omnibus Opinion -- 1996”: • Revenue is recognized when transaction is completed with provision for uncollectible accounts • Par. 12 is the source for installment method if collection is doubtful -- it isn’t in the case of Hesser

30. Bell Technologies, Inc. Objectives and Key words • Discounting Installment Payments: • Keyword: Present value (66 hits) AND interest (7 hits) • APB No. 21, “Interest on Receivables and Payables” • Impute interest rate per Pars. 13 & 14 • at a minimum, it is the prime rate of 10%, but 12% is more appropriate (the rate of credit line)

31. Bell Technologies, Inc. Objectives and Key words • Major Customers: • Keyword: major customers (6 hits) • FAS No. 131, “Disclosure about Segments of an Enterprise and Related Information” • Par. 39, "An enterprise shall provide information about the extent of its reliance on its major customers”

32. Bell Technologies, Inc. Objectives and Key words • Related Parties Disclosure: • Keywords: Related party transactions (36 hits) AND disclosure requirements (2 hits) • FAS No. 57, “Related Party Disclosures” • Per Par. 24f, Bell and Hesser are related because Hesser “can significantly influence the management of Bell (Hesser may also be equally dependent on Bell)

33. Bell Technologies, Inc. Objectives and Key words • Deferred Income taxes • Keywords: Temporary differences (266 hits) AND deferred income taxes (81 hits) • SFAS No. 109, “Accounting for Income Taxes” • Per Par 41, deferred tax liability representing the tax effects of the uncollected installment receivables classified as current assets should be classified as a current item and the balance of deferred tax liability as non-current item.