First Advanced Accounting Lecture
A few friends missed the first lecture of ACCT 331: Global Financial Reporting and asked for my notes. I’ve had them in my bag for a week, but keep missing the opportunity to pass them along. So I thought I’d write them up here (below).
Also, writing this out also helps me crystallize to myself why I’m excited about the course (that’s right, excited about accounting):
What is the purpose of accounting?
To enable and enhance capital allocation decisions. This relates to valuation, monitoring management, enabling regulation (e.g. rules around bank capital), providing information to decisions makers and stakeholders, and many other reasons. Accounting has many “characteristics”, such as transparency and standardization, supporting the field’s purpose.
What stakeholders are involved?
Investors (both equity and debt), suppliers, clients, regulators, competitors, government, and the general public. It’s debatable which stakeholder is the “most” important (class had wide array of opinions and arguments).
Who creates accounting rules?
- “Independent bodies” such as FASB (US) and IASB (UK, Europe, many other countries). Though there’s some fuzziness as to how impartial they are. FASB is funded by a value-weighted tax collected by the government. IASB is funded through donations.
- Lawmakers (e.g. Congress)
- SEC enforces accounting rules, but reports to Congress
- Industry Groups create reporting standards for their industries
- Civil courts and case law
- Auditors
Key takeaway is that accounting rules are a highly politicized process.
What is due process?
- Accounting standards boards must obtain and process input
- Opinions solicited on proposals. Typically either a) No! b) Okay, but… or c) Love it!
- Comment letters flow in from everywhere—often they can signal what companies are hiding
- Benefits:
- Perspectives are heard, particularly useful on complicated issues
- Buy-in is developed from constituents
- The process is stable and provides enough time for reflection and analysis
- Costs
- The process can be slow
- Biases are heard and they can influence final decisions
Big changes are coming: Convergence of standards to IFRS
- Enables better investor digestion
- Likely improve efficiency across regulation, enforcement, local adjustment & auditing
- Convergence in standards does not imply convergence in reporting
Philosophies:
- IFRS: Fair value, principle-based
- US GAAP: Historical cost, rules-based
Top takeaways:
- Always know the source guidance. There is power in the details.
- Accounting is dynamic. Accounting textbooks are dangerous. Throw them out.
- Evolution of accounting rules is highly political. High stakes involved.
- Knowing accounting affords competitive advantage. You spot signals others can’t.
The biggest bonus of this class is the enthusiasm of Alan Jangolinzer. Through stories of airplanes hitting Turkey Vultures and videos of Ashlee Simpson, he’s some how motivated me to read FASB and IFRS source guidance at 6:30am on Monday and Friday mornings as I prep for 8am class.
If you have accounting experience and are on the on the fence about taking this course, I’d highly encourage you to talk to Alan if you’re leaning any way but ‘yes’.
Below: Ashlee Simpson getting caught lip syncing on SNL (I didn’t know about this event until Alan cited it as an example of an asset impairment in class).
