HIGHER COLLEGE OF TECHNOLOGY

BUSINESS STUDIES DEPARTMENT

Course Handout in

ACCOUNTING THEORY
(BAAC 4204)

Chapter 1
An Introduction to Accounting Theory
1.1 Overview
Accounting is frequently viewed as a dry, cold, and highly analytical discipline
with very precise answers that are either correct or incorrect. Nothing could be
further from the truth. To take a simple example, assume two enterprises that are
otherwise similar are valuing their inventory and cost of goods sold using different
accounting methods. Company A selects weighted average and Company B selects
FIFO (first-in, first-out), giving totally different but equally correct answers.
However, one might say that a choice among inventory methods is merely an
accounting construct: the kinds of games accountants play that are solely of
interest to them but have nothing to do with the real world. Once again this is
totally incorrect. An accounting construct has an important social reality: how
much income tax is paid.
Income tax payments are not the only social reality that accounting numbers affect.
Here are some other examples:
1. Income numbers can be instrumental in evaluating the performance of
management, which can affect salaries and bonuses and even whether
individual management members retain their jobs.
2. Income numbers and various balance sheet ratios can affect dividend
payments.
3. Income numbers and balance sheet ratios can affect the firms credit
standing and, therefore, the cost of capital.
4. Different income numbers might affect the price of the firms stock if the
stock is publicly traded and the market cannot see through the accounting
methods that have been used.
ACTIVITY 1: DISCUSSION FORUM
Since accounting numbers can have important social consequences, why is it that
we cannot always measure economic reality accurately? Different perceptions
exist of economic reality. For example, on the one hand, we may say that the value
of an asset is equal to the amount paid for it in markets in which the asset is
ordinarily acquired, or, on the other hand, some may see an assets value
represented by the amount the firm can acquire by selling the asset. These two

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values are not the same. The former value is called replacement cost or entry value,
and the latter is called exit value (these are not the only possible value choices).
Exit values are usually lower than entry values because the owning enterprise does
not generally have the same access to buyers as firms that regularly sell the asset
through ordinary channels. Hence, there is a valuation choice between exit and
entry values. Suppose, however, that we take the position that both of these
valuations have merit but they are not easy to measure because market quotations
are not available and users may not understand what these valuations mean. Hence,
a third choice may arise: historical cost. While entry and exit values represent
some form of economic reality, the unreliability of the measurements may lead
some people to opt for historical cost on the grounds that users understand it better
than the other two approaches and measurement of the historical cost number may
be more reliable.
The question we have just been examining, the choice among accounting values,
including historical cost, falls within the realm of accounting theory. There are,
however, other issues that arise in this example, both implicit and explicit:
1. For what purposes do users need the numbers (e.g., evaluating
managements performance, evaluating various aspects of the firms credit
standing, or even using the accounting numbers as an input for predicting
how well the enterprise will do in the future)?
2. How costly will it be to generate the desired measurement?
The choice among the different types of values, as well as the related issues, falls
within the domain of accounting theory. The term accounting theory is actually
quite mysterious.
1.2 Definition of Accounting Theory
Accounting theory is defined here as the basic assumptions, definitions,
principles, and conceptsand how we derive themthat underlie accounting rule
making by a legislative body. Accounting theory also includes the reporting of
accounting and financial information. The study of accounting theory involves a
review of both the historical foundations of accounting practices, as well as the
way in which accounting practices are verified and added to the regulatory
framework that governs financial statements and financial reporting.
There has been and will continue to be extensive discussion and argumentation as
to what these basic assumptions, definitions, principles, and concepts should be;
thus, accounting theory is never a final and finished product. Dialogue always
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continues, particularly as new issues and problems arise. As the term is used here,
it applies to financial accounting and not to managerial or governmental
accounting. Financial accounting refers to accounting information that is used by
investors, creditors, and other outside parties for analyzing management
performance and decision-making purposes.
We interpret the definition of accounting theory broadly. Clearly, the drafting of a
conceptual framework that is supposed to provide underlying guidance for the
making of accounting rules falls within the coverage of accounting theory.
Analyzing accounting rules to see how they conform to a conceptual framework or
other guiding principles likewise falls within the accounting theory realm. While
the actual practice of accounting is generally of less theoretical interest, questions
such as why firms choose particular methods when choice exists (the LIFO versus
weighted average question, for example) are of theoretical interest because we
want to know the reasons underlying the choice. In a pragmatic sense, one can say
that accounting theory is concerned with improving financial accounting and
statement presentation, although, because their interests are not exactly the same,
conflict may exist between managers and investors, and among other groups,
relative to the issue of what improves financial statements.
We can also examine the types of topics, issues, and approaches discussed as part
of accounting theory. In addition to conceptual frameworks and accounting
legislation, accounting theory includes concepts (e.g., realization and objectivity),
valuation approaches, and hypotheses and theories. Hypotheses and theories are
based on a more formalized method of investigation and analysis of subject matter
used in academic disciplines such as economics and other social sciences
employing research methods from philosophy, mathematics, and statistics. This
newer and more formal approach to the development of accounting theory is a
relatively recent innovation in our field and permeates much of the current
accounting research. Researchers are attempting to analyze accounting data to
explain or predict phenomena related to accounting, such as how users employ
accounting information or how preparers choose among accounting methods.
We begin by briefly examining the relationship between accounting theory and the
institutional structure of accounting. Closely related to accounting theory is the
process of measurement. Measurement is the assignment of numbers to properties
or characteristics of objects. Measurement and how it applies to accounting are
introduced in the next chapter.
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1.3 Accounting Theory and Policy Making

The relationship between accounting theory and the standard-setting process must
be understood within its wider context as shown in Exhibit 1.3. Economic
conditions have an impact on both political factors and accounting theory. Political
factors, in turn, also have an effect on accounting theory.
Bodies such as the Financial Accounting Standards Board (FASB) and the
Securities and Exchange Commission (SEC), which are charged with making
financial accounting rules, perform a policy function. This policy function is also
called standard setting or rule making and specifically refers to the process of
arriving at the pronouncements issued by the FASB, the SEC, or the International
Accounting Standards Board (IASB). The inputs to the policy-making function
come from three main (although not necessarily equal) sources: economic factors,
political factors, and accounting theory.
Exhibit 1.3 Financial Accounting Environment

The best example of an economic factor is the steep inflation of the 1970s in the
United States, which was undoubtedly the catalyst that led the FASB to force the
disclosure of information concerning price changes, and is a classic example of an
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economic condition that impinged on policy making. Another example of an

economic factor is the acceleration of mergers and acquisitions.
The term political factors refer to the effect on policy making of those who are
subject to the resulting rules or regulations. Included in this category are auditors,
who are responsible for assessing whether the rules have been followed; preparers
of financial statements, represented by organizations such as Financial Executives
International (FEI); and investors, represented by organizations such as the CFA
Institute and the public itself, who might be represented by governmental groups
such as Congress, or by departments or agencies of the executive branch of
government, such as the Securities and Exchange Commission (SEC).
In addition, the management of major firms and industry trade associations are
important political components of the policy-making process. Although it has been
important to give voice to those who are affected by accounting rule making, it
should be remembered that political factors can subvert the standard-setting
process.
Accounting theory is developed and refined by the process of accounting research.
Accounting professors are the primary producers of accounting research, but many
individuals from policy-making organizations, public accounting firms, and private
industry also play an important role in the research process.
Standards and other pronouncements of policy-making organizations are
interpreted and put into practice at the organizational level. Hence, the output of
the policy level is implemented at the accounting practice level. Of course we have
now entered an era when failures of large publicly traded companies (e.g., Enron,
WorldCom, Lehman Brothers Holdings) are going to have a significant impact on
financial accounting standards, auditing rules, and institutional structures of
organizations such as the FASB and the SEC.
Users consist of many groups and include actual and potential shareholders and
creditors as well as the public at large. It is important to remember that users not
only employ financial statements and reporting in making decisions, but they are
also affected by the policy-making function and its implementation at the
accounting practice level.
All facets of the accounting theory and policy environment are important and are
considered in this book. Our principal focus is on that part of the track running
between accounting theory and the accounting policy function.
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Chapter 2
The Accounting Conceptual Framework
2.1 What is a conceptual framework?
In a broad sense a conceptual framework can be seen as an attempt to define the
nature and purpose of accounting. A conceptual framework must consider the
theoretical and conceptual issues surrounding financial reporting and form a
coherent and consistent foundation that will underpin the development of
accounting standards. It is not surprising that early writings on this subject were
mainly from academics.
Conceptual frameworks can apply to many disciplines, but when specifically
related to financial reporting, a conceptual framework can be seen as a statement of
generally accepted accounting principles (GAAP) that form a frame of reference
for the evaluation of existing practices and the development of new ones. As the
purpose of financial reporting is to provide useful information as a basis for
economic decision making, a conceptual framework will form a theoretical basis
for determining how transactions should be measured (historical value or current
value) and reported i.e. how they are presented or communicated to users.
Some accountants have questioned whether a conceptual framework is necessary
in order to produce reliable financial statements. Past history of standard setting
bodies throughout the world tells us it is. In the absence of a conceptual
framework, accounting standards were often produced that had serious defects
that is:
they were not consistent with each other particularly in the role of prudence
versus accruals/matching
they were also internally inconsistent and often the effect of the transaction
on the statement of financial position was considered more important than its
effect on income the statement
Standards were produced on a firefighting approach, often reacting to a
corporate scandal or failure, rather than being proactive in determining best
policy.
Some standard setting bodies were biased in their composition (i.e. not fairly
representative of all user groups) and this influenced the quality and
direction of standards

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 The same theoretical issues were revisited many times in successive

standards for example, does a transaction give rise to an asset (research
and development expenditure) or liability (environmental provisions)?
Benefits of a conceptual framework for financial reporting include: establishing
precise definitions that facilitate discussion of accounting issues; providing
guidance to accounting standard setters when developing and reviewing financial
reporting rules; helping to ensure that accounting standards are internally
consistent; helping preparers and auditors to resolve financial reporting problems
in the absence of an accounting standard; and helping to limit the volume of
accounting standards by providing an overarching theory of accounting that can be
applied to specific reporting problems.
2.2 Why is the IASB revising the Conceptual Framework?
The IASB's existing Conceptual Framework was developed by its predecessor
body, the International Accounting Standards Committee, in 1989. The material on
the objective of financial reporting and on the qualitative characteristics of
financial information was revised by the IASB in 2010 as the result of a joint
project with the US national standard-setter, the Financial Accounting Standards
Board (FASB).
Although the existing Conceptual Framework has helped the IASB when
developing and revising International Financial Reporting Standards:
some important areas are not covered;
the guidance in some areas is unclear; and
Some aspects of the existing Conceptual Framework are out of date.
In 2011 the IASB carried out a public consultation on its agenda. Most respondents
to that consultation identified the Conceptual Framework as a priority project for
the IASB. Consequently, the IASB restarted its Conceptual Framework project in
2012.
2.2.1 Exposure Draft
On 28 May 2015 the IASB published an Exposure Draft that sets out the proposals
for a revised Conceptual Framework. The deadline for comments on this Exposure
Draft is 26 October 2015.
The Exposure Draft has been developed in the light of the responses received on
the Discussion: A Review of the Conceptual Framework for Financial Reporting,
which was published in July 2013.
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The reasons for the proposals in the Exposure Draft are summarized in the Basis
for Conclusions that accompanies the Exposure Draft.
2.2.2 Who will be affected by a revised Conceptual Framework?
The Conceptual Framework is not a Standard and does not override specific
Standards. Hence, the proposed changes to the Conceptual Framework will not
have an immediate effect on the financial statements of most reporting entities.
However, some entities could be affected by the changes directly if they need to
use the Conceptual Framework to develop or select accounting policies when no
Standard specifically applies to a transaction.
In future, the Conceptual Framework will guide the IASB when it develops
Standards, so it will affect financial statements indirectly when entities implement
new or revised Standards based on the revised Conceptual Framework.
What are the next steps in the project?
The IASB will consider the comments received on the Exposure Draft when
developing the revised Conceptual Framework. The IASB aims to finalize the
revised Conceptual Framework in 2016.
2.3 Proposed Improvement in the Conceptual Framework
The Discussion Paper contains almost 240 pages and is divided into nine chapters,
which are accompanied by eight appendices. The paper is preceded by an almost
10 page executive summary containing the scope, the purpose, and the main
contents of the document.
The key issues dealt with in each chapter are summarized below.

Section 1 (Introduction) The first section offers background information. It

also describes the purpose of the conceptual framework and its status within
the hierarchy of IASB pronouncements. The discussion paper explains that
the conceptual framework's primary purpose is to assist the IASB in developing and revising IFRSs (even though it may be useful to parties other than
the IASB) and that the framework does not override any specific IFRS.
Should the IASB decide to issue a new or revised pronouncement that is in
conflict with the framework; the IASB will highlight the fact and explain the
reasons for the departure going forward.

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Section 2 (Elements) Core of this section is a clarification of the definitions of 'assets' and 'liabilities' the IASB believes to be necessary. The framework will no longer refer to expected inflows or outflows of economic benefits but directly to the underlying resource or obligation. An 'economic resource' is defined as a right or other source of value that is capable of producing economic benefit. Additionally, the notion of probability will be
removed from the definitions. In addition to assets and liabilities this section
also defines income and expense, cash receipts and payments as well as contributions to, distributions of and transfers between classes of equity.

Section 3 (Additional guidance) This section contains further guidance on

the definitions of assets and liabilities as outlined in the previous section. It
aims mainly at testing the usefulness of the definitions in areas that have led
to application problems in the past (e.g. the questions of what constitutes a
constructive obligation and whether economic compulsion can play a role
etc.). Most attention is given to discussing the meaning of 'present obligation' in connection with a liability; three different views are presented and
respondents are asked for their comments.

Section 4 (Recognition/De-recognition) This section discusses the requirements for recognizing assets and liabilities. Generally all assets and liabilities are to be recognized unless recognizing an asset or a liability is considered irrelevant or not sufficiently relevant to justify the costs for doing so
or no measurement of the item would lead to a sufficiently faithful representation. In these cases the IASB will be allowed to depart from the general
completeness requirement. For the first time the framework will also contain
de-recognition requirements. The IASB suggests that an item is to be derecognized when it no longer meets the recognition criteria. Variants are discussed for certain borderline cases.

Section 5 (Equity) - The fifth section is dedicated to equity which continues

to be defined as residual interest. However, the IASB suggest refining the
definition. New and rather revolutionary is the proposed introduction of a requirement to update the measure of the different classes of equity claims at
the end of each reporting period in order to show dilution effects. Finally the
section addresses the question whether the most subordinated class of instruments should be treated as equity if an entity has issued no equity instruments.

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Section 6 (Measurement) In this section the IASB takes a closer look at

measurement and describes the objectives of the different categories of
measurement and how an appropriate measurement can be identified. The
IASB believes using one measurement across all items of the balance sheet
is not appropriate. It argues that every measurement should lead to relevant
information on the balance sheet and in the statement of comprehensive
income selecting an appropriate measurement will have to be subordinated
to this objective.

Section 7 (Presentation and Disclosure) This section doesn't have a counterpart in the existing framework. Therefore, it contains a longer explanation
of the purpose of the primary financial statements and the notes to the financial statements and their relationship. In this context the IASB also addresses
materiality and forward-looking information.

Section 8 (Statement of comprehensive income) The eighth section mainly

deals with distinguishing between profit and loss and other comprehensive
income. The IASB suggests retaining both profit and loss and other comprehensive income and marking them by (sub)totals. As a principle, all income
and expense will be shown in profit and loss unless relating to the re-measurement of assets and liabilities - these would normally be shown in other
comprehensive income with recycling generally permitted. A definition of
profit and loss is not included in the conceptual framework.

Section 9 (Other issues) The last section is a collection of a variety of quite

different issues. The IASB suggests leaving the revised chapters on objectives and qualitative characteristics basically unchanged, considering the use
of the business model in financial reporting, addressing the unit of account
on standard level, considering the impact of the going concern assumption
on accounting (when measuring assets and liabilities, when identifying liabilities and when making disclosures) as well as taking over the description
and discussion of capital maintenance largely unchanged from the existing
framework (the IASB may reconsider the concept of capital maintenance if
it launches a project on hyperinflation).

2.4 Purpose and status of the Framework

This brings us to the International Accounting Standards Boards (IASB) The
Conceptual Framework for Financial Reporting (the Framework), which is in
essence the IASBs interpretation of a conceptual framework and in the process of
being updated. The main purpose of the Framework is to:
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 The IASB uses the Conceptual Framework when it develops or revises its
IFRSs.
The Conceptual Framework sets out the underlying concepts for the
preparation and presentation of financial statements and forms the basis for
specific recognition and measurement requirements in IFRSs.
The Conceptual Framework should enable the IASB to reach consistent
conclusions on a variety of complex financial reporting matters. It should
also assist other parties when accounting for items not covered by a
particular IFRS.
2.5 The Scope of IFRS Framework
The IFRS Framework addresses:
the objective of financial reporting
the qualitative characteristics of useful financial information
the reporting entity
the definition, recognition and measurement of the elements from which
financial statements are constructed
concepts of capital and capital maintenance [IFRS Framework, Scope]
2.5.1 The Objective of general purpose financial reporting
The objective of general purpose financial reporting is to provide useful financial
information.
The primary users of general purpose financial reporting are present and potential
investors, lenders and other creditors, who use that information to make decisions
about buying, selling or holding equity or debt instruments and providing or
settling loans or other forms of credit. [F OB2]
The primary users need information about the resources of the entity not only to
assess an entity's prospects for future net cash inflows but also how effectively and
efficiently management has discharged their responsibilities to use the entity's
existing resources (i.e., stewardship). [F OB4]
The IFRS Framework notes that general purpose financial reports cannot provide
all the information that users may need to make economic decisions. They will
need to consider pertinent information from other sources as well. [F OB6]
The IFRS Framework notes that other parties, including prudential and market
regulators, may find general purpose financial reports useful. However, the Board
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considered that the objectives of general purpose financial reporting and the
objectives of financial regulation may not be consistent. Hence, regulators are not
considered a primary user and general purpose financial reports are not primarily
directed to regulators or other parties. [F OB10 and F BC1.20-BC 1.23]
ACTIVITY 2: DISCUSSION FORUM

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Chapter 3
Accounting Theory- Concepts, Assumptions and Conventions
Accounting Concepts and Principles are a set of broad conventions that have been
devised to provide a basic framework for financial reporting. As financial reporting
involves significant professional judgments by accountants, these concepts and
principles ensure that the users of financial information are not mislead by the
adoption of accounting policies and practices that go against the spirit of the
accountancy profession. Accountants must therefore actively consider whether the
accounting treatments adopted are consistent with the accounting concepts and
principles.
In order to ensure application of the accounting concepts and principles, major
accounting standard-setting bodies have incorporated them into their reporting
frameworks such as the IASB Framework.
3.1 Qualitative characteristics of useful financial information
The qualitative characteristics of useful financial reporting identify the types of
information are likely to be most useful to users in making decisions about the
reporting entity on the basis of information in its financial report. The qualitative
characteristics apply equally to financial information in general purpose financial
reports as well as to financial information provided in other ways. [F QC1, QC3]
Financial information is useful when it is relevant and represents faithfully what it
purports to represent. The usefulness of financial information is enhanced if it is
comparable, verifiable, timely and understandable. [F QC4]
3.1.1 Fundamental qualitative characteristics
Relevance and faithful representation are the
characteristics of useful financial information. [F QC5]

fundamental

qualitative

Relevance
Relevant financial information is capable of making a difference in the decisions
made by users. Financial information is capable of making a difference in
decisions if it has predictive value, confirmatory value, or both. The predictive
value and confirmatory value of financial information are interrelated. [F QC6QC10]

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Examples:
(a) A company discloses an increase in Earnings per Share (EPS) from $5 to $6
since the last reporting period. The information is relevant to investors as it
may assist them in confirming their past predictions regarding the
profitability of the company and will also help them in forecasting future
trend in the earnings of the company. Relevance is affected by the
materiality of information contained in the financial statements because only
material information influences the economic decisions of its users.
(b) A default by a customer who owes $1000 to a company having net assets of
worth $10 million is not relevant to the decision making needs of users of
the financial statements. However, if the amount of default is, say, $2
million, the information becomes relevant to the users as it may affect their
view regarding the financial performance and position of the company.
Materiality is an entity-specific aspect of relevance based on the nature or
magnitude (or both) of the items to which the information relates in the context of
an individual entity's financial report. [F QC11]
Example - Size
(a) A default by a customer who owes only $1000 to a company having net
assets of worth $10 million is immaterial to the financial statements of the
company. However, if the amount of default was, say, $2 million, the
information would have been material to the financial statements omission
of which could cause users to make incorrect business decisions.
Example - Nature
(b) If a company is planning to curtail its operations in a geographic segment
which has traditionally been a major source of revenue for the company in
the past, then this information should be disclosed in the financial statements
as it is by its nature material to understanding the entity's scope of operations
in the future.
Faithful representation
General purpose financial reports represent economic phenomena in words and
numbers, to be useful, financial information must not only be relevant, it must also
represent faithfully the phenomena it purports to represent. This fundamental
characteristic seeks to maximize the underlying characteristics of completeness,

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neutrality and freedom from error. [F QC12] Information must be both relevant
and faithfully represented if it is to be useful. [F QC17]
Example:
(a) A machine is leased to Company A for the entire duration of its useful life.
Although Company A is not the legal owner of the machine, it may be
recognized as an asset in its balance sheet since the Company has control
over the economic benefits that would be derived from the use of the asset.
This is an application of the accountancy concept of substance over legal
form, where economic substance of a transaction takes precedence over its
legal aspects.
(b) There is widespread use of substance over form concept in accounting.
Following are examples of the application of the concept in the International
Financial Reporting Standards (IFRS).
3.1.2 Enhancing qualitative characteristics
Comparability, verifiability, timeliness and understandability are qualitative
characteristics that enhance the usefulness of information that is relevant and
faithfully represented. [F QC19]
Comparability
Information about a reporting entity is more useful if it can be compared with
similar information about other entities and with similar information about the
same entity for another period or another date. Comparability enables users to
identify and understand similarities in, and differences among, items. [F QC20QC21]
Example:
(a) If a company that retails leather jackets valued its inventory on the basis of
FIFO method in the past, it must continue to do so in the future to preserve
consistency in the reported inventory balance. A switch from FIFO to
Weighted Average basis of inventory valuation may cause a shift in the
value of inventory between the accounting periods largely due to seasonal
fluctuations in price.

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Verifiability
Verifiability helps to assure users that information represents faithfully the
economic phenomena it purports to represent. Verifiability means that different
knowledgeable and independent observers could reach consensus, although not
necessarily complete agreement, that a particular depiction is a faithful
representation. [F QC26]
Example:
a) If a company tells you that total revenue is $200,000, total costs are
$125,000 and profit is $75,000, the math is verifiable -- but if the revenue
and cost figures are incorrect, the profit figure is not accurate. As mentioned,
verifiability also doesn't pass judgment on whether the assumptions made
are correct or even appropriate, just whether the result matches the
assumptions. Finally, verifiability is silent on the interpretation of
accounting results.
b) A company may tell shareholders that it's strong because revenue rose 25
percent last year. The claim about revenue increasing can be tested for
verifiability; what the increase says about the company's prospects cannot.
Timeliness
Timeliness means that information is available to decision-makers in time to be
capable of influencing their decisions. [F QC29]
Example:
(a) Users of accounting information must be provided financial statements on a
timely basis to ensure that their financial decisions are based on up to date
information. This can be achieved by reporting the financial performance of
companies with sufficient regularity (e.g. quarterly, half yearly or annual)
depending on the size and complexity of the business operations.
Unreasonable delay in reporting accounting information to users must also
be avoided.
In several jurisdictions, regulatory authorities (e.g. stock exchange
commission) tend to impose restrictions on the maximum number of days
that companies may take to issue financial statements to the public.

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Timeliness of accounting information is also emphasized in IAS 10 Events

after the Reporting Period which requires entities to report all significant
post balance sheet events that occur up to the date when the financial
statements are authorized for issue. This ensures that users are made aware
of any material transactions and events that occur after the reporting period
when the financial statements are being issued rather than having to wait for
the next set of financial statements for such information.
Understandability
Classifying, characterizing and presenting information clearly and concisely make
it understandable. While some phenomena are inherently complex and cannot be
made easy to understand, to exclude such information would make financial
reports incomplete and potentially misleading. Financial reports are prepared for
users who have a reasonable knowledge of business and economic activities and
who review and analyze the information with diligence. [F QC30-QC32]
Example:
(a) One of the main problems with the financial statements of ENRON was that
it contained a very complicated structure of special purpose entities that
were presented in a manner that concealed the financial risk exposure of the
company. The accounting treatments of ENRON were not comprehensible
by the capital market participants who consistently overvalued its worth
until the inevitable collapse of its share price in 2001 upon the news of its
bankruptcy.
3.1.3 Applying the enhancing qualitative characteristics
Enhancing qualitative characteristics should be maximized to the extent necessary.
However, enhancing qualitative characteristics (either individually or collectively)
cannot make information useful if that information is irrelevant or not represented
faithfully. [F QC33]
ACTIVITY 3: DISCUSSION FORUM
3.2 The cost constraint on useful financial reporting
Cost is a pervasive constraint on the information that can be provided by general
purpose financial reporting. Reporting such information imposes costs and those
costs should be justified by the benefits of reporting that information. The IASB
assesses costs and benefits in relation to financial reporting generally, and not
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solely in relation to individual reporting entities. The IASB will consider whether
different sizes of entities and other factors justify different reporting requirements
in certain situations. [F QC35-QC39]
3.3 Going Concern Assumption
The IFRS Framework states that the going concern assumption is an underlying
assumption. Thus, the financial statements presume that an entity will continue in
operation indefinitely or, if that presumption is not valid, disclosure and a different
basis of reporting are required. [F 4.1]
3.3.1 Examples: Possible indications of going concern problems
(a) Deteriorating liquidity position of a company not backed by sufficient
financing arrangements.
(b) High financial risk arising from increased gearing level rendering the
company vulnerable to delays in payment of interest and loan principle.
(c) Significant trading losses being incurred for several years. Profitability of a
company is essential for its survival in the long term.
(d) Aggressive growth strategy not backed by sufficient finance which
ultimately leads to over trading.
(e) Increasing level of short term borrowing and overdraft not supported by
increase in business.
(f) Inability of the company to maintain liquidity ratios as defined in the loan
covenants.
(g) Serious litigations faced by a company which does not have the financial
strength to pay the possible settlement.
(h) Inability of a company to develop a new range of commercially successful
products. Innovation is often said to be the key to the long-term stability of
any company.
(i) Bankruptcy of a major customer of the company.
ADDITIONAL RESOURCES:
Check in your e-learning the non-exhaustive list of possible indications of going
concern problems (ISA 570 Going Concern).

3.4 Concepts of Capital and Capital Maintenance

The existing Conceptual Framework introduced two main concepts of capital:
financial capital and physical capital.

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Financial capital concept states that capital is synonymous with the net assets or
equity of the entity. Physical capital concept states that capital is regarded as the
operating or productive capacity of the entitys assets.
The selection of the appropriate capital concept by an entity should be based on the
needs of users of its financial statements.
The financial capital concept should be used if the users are primarily concerned
with the maintenance of nominal invested capital or the purchasing power of
invested capital.
The physical capital concept should be adopted if the users are mainly concerned
with the operating capability of the entity. The capital concept chosen designates
the goal to be attained in the determination of profit.
The concepts of capital give rise to two concepts of capital maintenance: financial
capital maintenance and physical capital maintenance.
Financial capital maintenance concept states that a profit is earned only if the
financial (i.e. invested money) amount of the nest assets at the end of the period
exceeds the financial amount of net assets at the beginning of the period, after
excluding any distributions to, and contributions from, owners during the period.
Physical capital maintenance concept states that a profit is earned only if the
physical productive capacity or operating capability of the entitys assets at the end
of the period exceeds the physical productive capacity at the beginning of the
period, after excluding any distributions to, and contributions from, owners during
the period.
The IASB would consider revising the capital maintenance if it were to carry out
future work on accounting for high inflation.

[19]

Chapter 4
The Development of Financial Accounting and Reporting Standards
Accrual accounting is the financial reporting model used by the majority of profitoriented companies and by many not-for-profit companies. The fact that companies
use the same model is important to financial statement users. Investors and
creditors use financial information to make their resource allocation decisions. Its
critical that they be able to compare financial information among companies. To
facilitate these comparisons, financial accounting employs a body of standards
known as generally accepted accounting principles, of-ten abbreviated
as GAAP (and pronounced gap).
GAAP are a dynamic set of both broad and specific guidelines that companies
should follow when measuring and reporting the information in their financial
statements and related notes.
4.1 Historical Perspective and Standards
Pressures on the accounting profession to establish uniform accounting standards
began to surface after the stock market crash of 1929. Some feel that insufficient
and misleading financial statement information led to inflated stock prices and that
this contributed to the stock market crash and the subsequent depression.
The 1933 Securities Act and the 1934 Securities Exchange Act were designed to
restore investor confidence. The 1933 act sets forth accounting and disclosure
requirements for initial offerings of securities (stocks and bonds). The 1934 act
applies to secondary market transactions and mandates reporting requirements for
companies whose securities are publicly traded on either organized stock
exchanges or in over-the-counter markets. The 1934 act also created the Securities
and Exchange Commission (SEC).
In the 1934 act, Congress gave the SEC both the power and responsibility for
setting accounting and reporting standards for companies whose securities are
publicly traded. However, the SEC, a government appointed body, has delegated
the primary responsibility for setting accounting standards to the private sector. It
is important to understand that the SEC delegated only the responsibility, not the
authority, to set standards. The power still lies with the SEC. If the SEC does not
agree with a particular standard issued by the private sector, it can force a change
in the standard. In fact, it has done so in the past.

[20]

The SEC does issue its own accounting standards in the form of Financial
Reporting Releases (FRRs), which regulate what, must be reported by companies
to the SEC itself. These standards usually agree with those previously issued by the
private sector. To learn more about the SEC, consult its Internet site at
www.sec.gov.
4.1.1 Early Standard Setting The first private sector body to assume the task of
setting accounting standards was the Committee on Accounting Procedure
(CAP). The CAP was a committee of the American Institute of Accountants (AIA).
The AIA, which was renamed the American Institute of Certified Public
Accountants (AICPA) in 1957, is the national organization of professional public
accountants. From 1938 to 1959, the CAP issued 51 Accounting Research Bulletins
(ARBs) which dealt with specific accounting and reporting problems. No
theoretical framework for financial accounting was established. This approach of
dealing with individual issues without a framework led to stern criticism of the
accounting profession.
In 1959 the Accounting Principles Board (APB) replaced the CAP. Members of the
APB also belonged to the AICPA. The APB operated from 1959 through 1973. It
issued 31 Accounting Principles Board Opinions (APBOs); various
Interpretations; and four Statements. The Opinions also dealt with specific
accounting and reporting problems. Many ARBs and APBOs have not been
superseded and still represent authoritative GAAP.
The APBs main effort to establish a theoretical framework for financial
accounting and reporting was APB Statement No. 4, Basic Concepts and
Accounting Principles Underlying Financial Statements of Business Enterprises.
Unfortunately, the effort was not successful.
The APB was composed of members of the accounting profession and was
supported by their professional organization. Members participated in the activities
of the board on a voluntary, part-time basis. The APB was criticized by industry
and government for its inability to establish an underlying framework for financial
accounting and reporting and for its inability to act quickly enough to keep up with
financial reporting issues as they developed. Perhaps the most important flaw of
the APB was a perceived lack of independence. Composed almost entirely of
public accountants, the board was subject to the criticism that the clients of the
represented public accounting firms were exerting self-interested pressure on the
board and influencing their decisions. Other interest groups were underrepresented
in the standard-setting process.
[21]

4.1.2 Current Standard Setting Criticism of the APB led to the creation in 1973
of the Financial Accounting Standards Board (FASB) and its supporting structure.
The FASB differs from its predecessor in many ways. There are seven full-time
members of the FASB, compared to 1821 part-time members of the APB. While
all of the APB members belonged to the AICPA, FASB members represent various
constituencies concerned with accounting standards. Members have included
representatives from the accounting profession, profit-oriented companies,
accounting educators, and government. The APB was supported financially by the
AICPA, while the FASB is supported by its parent organization, the Financial
Accounting Foundation (FAF). The FAF is responsible for selecting the members
of the FASB and its Advisory Council, ensuring adequate funding of FASB
activities, and exercising general oversight of the FASBs activities. The FASB is,
therefore, an independent, private sector body whose members represent a broad
constituency of interest groups.
In 1984, the FASBs Emerging Issues Task Force (EITF) was formed to provide
more timely responses to emerging financial reporting issues. The EITF
membership includes 15 individuals from public accounting and private industry,
along with a representative from the FASB and an SEC observer. The membership
of the task force is designed to include individuals who are in a position to be
aware of emerging financial reporting issues. The task force considers these
emerging issues and attempts to reach a consensus on how to account for them. If
consensus can be reached, generally no FASB action is required. The task force
disseminates its rulings in the form of EITF Abtracts. These pronouncements are
considered part of generally accepted accounting principles.
If a consensus cant be reached, FASB involvement may be necessary. The EITF
plays an important role in the standard-setting process by identifying potential
problem areas and then acting as a filter for the FASB. This speeds up the
standard-setting process and allows the FASB to focus on pervasive long-term
problems.
One of the FASBs most important activities has been the formulation of
a conceptual framework. The FASB has issued eight (8) Statements of Financial
Accounting Concepts (SFACs) to describe its conceptual framework. The board
also has issued 168 specific accounting standards, called Statements of Financial
Accounting Standards (SFASs), as well as numerous FASB Interpretations and
Technical Bulletins.

[22]

The FASB Accounting Standards Codification (FASB Codification) is the sole

source of authoritative GAAP other than SEC issued rules and regulations that
apply only to SEC registrants.
The codification is effective for interim and annual periods ending after September
15, 2009. All existing accounting standards documents are superseded as described
in FASB Statement No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles.
The Codification reorganizes the thousands of U.S. GAAP pronouncements into
roughly 90 accounting topics and displays all topics using a consistent structure. It
also includes relevant U.S. Securities and Exchange Commission (SEC), guidance
that follows the same topical structure in separate sections in the Codification.
Format
General Principles (105)
Presentation (205 280)
Financial Statement Accounts:
Assets (305 360)
Liabilities (405 480)
Equity (505)
Revenue (605 610)
Expenses (705 740)
Broad Transactions (805 860)
Industry (905 995)
The Codifications categories are organized by Topic, Subtopic, Section, and
paragraph, each with a numerical designation. The Sections in every Subtopic are
labelled uniformly, as follows:
00
05
10
15
20
25

Status
Overview and Background
Objectives
Scope and Scope Exceptions
Glossary
Recognition

30
32
35

Initial Measurement
Measurement
Subsequent Measurement

40
Derecognition
45
Other Presentation Matters
50
Disclosure
55
Implementation Guidance and Illustrations
60
Relationships
65
Transition and Open Effective Date
Information
70
Grandfathered Guidance
75
XBRL Elements
S99
SEC Material

[23]

While the Codification does not change GAAP, it introduces a new structureone
that is organized in an easily accessible, user-friendly online research system. The
FASB expects that the new system will reduce the amount of time and effort
required to research an accounting issue, mitigate the risk of noncompliance with
standards through improved usability of the literature, provide accurate
information with real-time updates as new standards are released, and assist the
FASB with the research efforts required during the standard-setting process.
All other accounting literature not included in the Codification is non-authoritative.
The FASB issues an Accounting Standards Update (Update or ASU) to
communicate changes to the FASB Codification, including changes to nonauthoritative SEC content. ASUs are not authoritative standards.
4.1.3 Toward Global Accounting Standards Most industrialized countries have
organizations responsible for determining accounting and reporting standards. In
some countries, the United Kingdom for instance, the responsible organization is a
private sector body similar to the FASB in the United States. In other countries,
such as France, the organization is a governmental body.
Accounting standards prescribed by these various groups are not the same.
Standards differ from country to country for many reasons, including different
legal systems, levels of inflation, culture, degrees of sophistication and use of
capital markets, and political and economic ties with other countries. These
differences can cause problems for multinational corporations. A company doing
business in more than one country may find it difficult to comply with more than
one set of accounting standards if there are important differences among the sets. It
has been argued that different national accounting standards impair the ability of
companies to raise capital in international markets.
In response to this problem, the International Accounting Standards Committee
(IASC) was formed in 1973 to develop global accounting standards. The IASC in
2001 reorganized itself and created a new standard-setting body called
the International Accounting Standards Board (IASB). The IASC now acts as an
umbrella organization similar to the Financial Accounting Foundation (FAF) in the
United States. This new global standard-setting structure is consistent with a recent
FASB vision report attempting to identify an optimal standard-setting
environment. The IASBs objectives are (1) to develop a single set of high quality,
understandable global accounting standards, (2) to promote the use of those
standards, and (3) to bring about the convergence of national accounting standards
and international accounting standards.
[24]

The IASC issued 41 International Accounting Standards (IASs). The IASB

endorsed these standards when it was formed in 2001. Since then, the IASB has
revised many of them and has issued thirteen (13) standards of its own,
called International Financial Reporting Standards (IFRSs). Compliance with these
standards is voluntary, since the IASB has no authority to enforce them. However,
more and more countries are basing their national accounting standards on
international accounting standards. The International Organisation of Securities
Commissions (IOSCO) approved a resolution permitting its members to use these
standards to prepare their financial statements for cross-border offerings and
listings. Beginning in 2005, all listed companies in the European Union (EU) must
prepare their consolidated financial statements using IFRS. Some 7,000 listed EU
companies are affected.
In the United States, the move toward convergence of accounting standards began
in earnest with the cooperation of the FASB and the IASC on the earnings per
share (EPS) issue. In 1994, the FASB and the IASC began working on projects
leading toward the issuance of new standards for the computation of EPS. The
intent of the FASBs project was to issue an EPS standard that would be
compatible with the new international standard and, at the same time, simplify U.S.
GAAP.
In 2002, the FASB and IASB signed the so-called Norwalk Agreement,
formalizing their commitment to convergence of U.S. GAAP and IFRS. Under this
agreement, the boards pledged to remove existing differences between their
standards and to coordinate their future standard-setting agendas so that major
issues are worked on together. Recent standards issued by the FASB on sharebased compensation, nonmonetary exchanges, and inventory costs are recent
examples of this commitment to convergence.
4.2 Rules-based GAAP versus Principles-based GAAP
The accounting scandals at Enron and other companies also rekindled the debate
over principles-based or more recently termed objectives-oriented, versus rulesbased accounting standards. In fact, a provision of the Sarbanes-Oxley Act
required the SEC to study the issue and provide a report to Congress on its
findings. That report, issued in July 2003, recommended that accounting standards
be developed using an objectives-oriented approach. The FASB also issued a
proposal addressing this issue.
[25]

Recent developments have increased the likelihood that U.S. regulators may permit
the use of International Financial Reporting Standards (IFRS) as well as (or
perhaps in place of) Generally Accepted Accounting Principles (U.S. GAAP) in
the near future. On April 24, the Securities and Exchange Commission (SEC)
announced that it will consider allowing domestic companies to choose which type
of accounting standards to follow in reporting their financial performance. In
addition, President Bush signed an agreement with the European Union on April
30 that will seek to ensure conditions for the US Generally Accepted Accounting
Principles and International Financial Reporting Standards to be recognized in
both jurisdictions without the need for reconciliation by 2009 or possibly sooner.
ACTIVITY 4: DISCUSSION FORUM
4.3. Financial Accounting Reform
The dramatic collapse of Enron in 2001 and the dismantling of the international
public accounting firm of Arthur Andersen in 2002 severely shook U.S. capital
markets. The credibility of the accounting profession itself as well as of corporate
America was called into question. Public outrage over accounting scandals at highprofile companies like WorldCom, Xerox, Merck, Adelphia Communications, and
others increased the pressure on lawmakers to pass measures that would restore
credibility and investor confidence in the financial reporting process.
4.3.1 The Enron Case
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of
the Enron Corporation, an American energy company based in Houston, Texas,
and the de facto dissolution of Arthur Andersen, which was one of the five
largest audit and accountancy partnerships in the world. In addition to being the
largest bankruptcy reorganization in American history at that time, Enron was
attributed as the biggest audit failure.
Enron was formed in 1985 by Kenneth Lay after merging Houston Natural
Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he
developed a staff of executives that, by the use of accounting loopholes, special
purpose entities, and poor financial reporting, were able to hide billions of dollars
in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and
other executives not only misled Enron's board of directors and audit committee on
high-risk accounting practices, but also pressured Andersen to ignore the issues.
Enron shareholders filed a $40 billion lawsuit after the company's stock price,
which achieved a high of US$90.75 per share in mid-2000, plummeted to less than
[26]

$1 by the end of November 2001.[2] The U.S. Securities and Exchange

Commission (SEC)
began
an
investigation,
and
rival
Houston
competitor Dynegy offered to purchase the company at a very low price. The deal
failed, and on December 2, 2001, Enron filed for bankruptcy under Chapter 11 of
the United States Bankruptcy Code. Enron's $63.4 billion in assets made it the
largest corporate bankruptcy in U.S. history until WorldCom's bankruptcy the next
year.
Many executives at Enron were indicted for a variety of charges and were later
sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty in a
United States District Court of illegally destroying documents relevant to the SEC
investigation which voided its license to audit public companies, effectively
closing the business. By the time the ruling was overturned at the U.S. Supreme
Court, the company had lost the majority of its customers and had ceased
operating. Employees and shareholders received limited returns in lawsuits, despite
losing billions in pensions and stock prices. As a consequence of the scandal, new
regulations and legislation were enacted to expand the accuracy of financial
reporting for public companies. One piece of legislation, the Sarbanes-Oxley Act,
increased penalties for destroying, altering, or fabricating records in federal
investigations or for attempting to defraud shareholders. The act also increased the
accountability of auditing firms to remain unbiased and independent of their
clients.
4.3.2 Sarbanes-Oxley
Driven by these pressures, Congress acted swiftly and passed the Public Company
Accounting Reform and Investor Protection ACT of 2002, commonly referred to as
the Sarbanes-Oxley Act for the two congressmen who sponsored the bill. The
legislation is comprehensive in its inclusion of the key players in the financial
reporting process. The law provides for the regulation of auditors and the types of
services they furnish to clients, increases accountability of corporate executives,
addresses conflicts of interest for securities analysts, and provides for stiff criminal
penalties for violators.

[27]

GRAPHIC 4-3
Public Company Accounting Reform and Investor Protection Act of 2002
Key Provisions of the Act:
Oversight board. The five-member (two accountants) Public Company
Accounting Oversight Board has the authority to establish standards dealing
with auditing, quality control, ethics, independence and other activities
relating to the preparation of audit reports, or can choose to delegate these
responsibilities to the AICPA. Prior to the act, the AICPA set auditing
standards. The SEC has oversight and enforcement authority.
Corporate executive accountability. Corporate executives must personally
certify the financial statements and company disclosures with severe
financial penalties and the possibility of imprisonment for fraudulent
misstatement.
Non-audit services. The law makes it unlawful for the auditors of public
companies to perform a variety of non-audit services for audit clients.
Prohibited services include bookkeeping, internal audit outsourcing,
appraisal or valuation services, and various other consulting services. Other
non-audit services, including tax services, require pre-approval by the audit
committee of the company being audited.
Retention of work papers. Auditors of public companies must retain all
audit or review work papers for five years or face the threat of a prison term
for wilful violations.
Auditor rotation. Lead audit partners are required to rotate every five years.
Mandatory rotation of audit firms came under consideration.
Conflicts of interest. Audit firms are not allowed to audit public companies
whose chief executives worked for the audit firm and participated in that
companys audit during the preceding year.
Hiring of auditor. Audit firms are hired by the audit committee of the board
of directors of the company, not by company management.
Internal control. Section 404 of the act requires that the company
management document and assess the effectiveness of all internal control
processes that could affect financial reporting. Company auditors express an
opinion on whether managements assessment of the effectiveness of
internal control is fairly stated. The PCAOBs Auditing Standard No. 2 also
requires that the company auditors express a second opinion on whether the
company has maintained effective internal control over financial reporting.
The changes imposed by the legislation are dramatic in scope and pose a
significant challenge for the public accounting profession. At the same time, many
[28]

maintain the changes were necessary to lessen the likelihood of corporate and
accounting fraud and to restore investor confidence in the U.S. capital markets.
Section 404 is perhaps the most controversial provision of the 2002 act. No one
argues the importance of adequate internal controls. However, the costs of
implementing this section of the act can be substantial. Not only are companies
required to document internal controls and assess their adequacy, but their auditors,
too, must provide an opinion on managements assessment. The Public Company
Accounting Oversight Boards (PCAOB) Auditing Standard No. 2 added an
additional requirement that auditors express a second opinion on whether the
company has maintained effective internal control over financial reporting.

4.4 IFRS 15: The New Revenue Recognition Standard

IFRS 15 Revenue from Contracts with Customers is the result of the joint project
initiated by International Accounting Standards Board (IASB) and the US
Financial Accounting Standards Board (FASB) to clarify the principles of
recognizing revenue and present a single revenue recognition model applicable to
all types of contracts with customers. IFRS 15 will be introduced into the FASBs
Accounting Standards Codification as Topic 606 replaces the earlier revenue
standard in Topic 605. Although the new revenue recognition standard is almost
fully converged, there are few differences such as timing of adoption, interim
disclosures and the collectability threshold for contracts.
IFRS 15 replaces all existing revenue standards: IAS 11 Construction Contracts,
IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements
for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers
and SIC-31 Revenue Barter Transactions Involving Advertising Services.
The new standard represents more than 300 pages of application guidance on
revenue recognition (including clarifications on a number of issues such as
licensing, sale with right of return, and customer options for additional goods or
services).
IFRS 15 will be of mandatory application for reporting period beginning on or
after 1 January 2017 with early application permitted.

[29]

4.4.1 Objective and Scope

The objective of IFRS 15 is to establish principles that an entity shall apply to
report useful information to users of financial statements about the nature, amount,
timing and uncertainty of revenue and cash flows arising from a contract with a
customer.
In meeting this objective, the core principle of revenue standard is that an entity
should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services.
4.4.2 The Five-Step Model
Having established this core principle, the standard establishes a five-step revenue
model that will apply to types of contracts with customers and all industry sectors.
The principles in the new standard will be applied using the five steps when
recognizing revenue:
Step 1: Identify the contract(s) with a customer
Contracts can be written, oral or implied by customary business practices and meet
all of the following criteria:
The parties have approved the contract;
The rights and payments terms for the goods or services to be transferred can
be identified;
The contract has commercial substance; and
It is probable that the entity will collect the consideration to which it will be
entitled in exchange for the goods or services.
In assessing whether collection is probable, the entity would consider only the
customers ability and intention to pay the consideration.
An entity may combine two or more contracts and account for them as a single
contract when entered into or near the same time with the same customer (or a
related party of the customer); and satisfied any of the condition set by the
standard.
The standard also provides the accounting treatment for contract modifications,
depending on whether these modifications are to be accounted for as a separate
contract or a modification of the original contract.
[30]

Step 2: Identify the separate performance obligations (POs) in the contract

In order to identify the performance obligations, the entity needs to consider
whether the promised good or service can be regarded as distinct from other
goods or services promised in the contract. A good or service is distinct (i) if the
customer can benefit from the good or service on its own or together with other
readily available resources; and (ii) whether the promise to transfer a good or
service is separately identifiable from other promises in the contract.
This step of identifying the performance obligations in the contract is important
because it relates to the remaining steps determination of the transaction price
(step 3), allocation of the transaction price to the separate performance obligations
(step 4), and timing of revenue recognition since performance obligations may be
satisfied at different time periods.
Careful assessment is required in the identification of performance obligations
particularly in industries where bundled contracts of product plus service are
common like telecommunications, software development, motor vehicle sales,
construction and engineering, and consulting contracts.
Step 3: Determine the transaction price (TP)
The transaction price is the amount of customer consideration to which an entity
expects to be entitled in exchange for transferring the promised goods or services.
Determining the transaction price may be difficult when the contract includes
consideration of:
the effect of the time value of money, if there is a significant financing
component to the contract
an estimate of variable components using either the expected value method
(based on probability weighted amounts within a range) or the most likely
amount method (the amount within a range that is most likely to occur),
whichever is better in predicting the amount of consideration to which the
entity is entitled
the effect of any amount payable to the customer
the fair value of any non-cash amounts
Step 4: Allocate the TP to the POs in the contract
The transaction price determined in step 3 is allocated to each distinct performance
obligation in an amount that reflects the amount of consideration to which the
[31]

entity expects to be entitled in exchange for transferring the promised goods or

services to the customer.
Allocating the transaction price to each performance obligation is based on the
relative stand-alone selling price to each distinct good or service. When
determining the stand-alone selling prices, the entity must use observable
information.
If the stand-alone selling price of a good or service is not observable in accordance
with the standard, the entity is required to estimate the stand-alone selling price
using one of the following suitable methods:
Adjusted market assessment method
Expected cost plus a margin method
Residual method
Step 5: Recognize the revenue when the entity satisfies a PO
Revenue is recognized when the entity satisfies a performance obligation by
transferring the control of a promised good or service to the customer. Revenue is
recognized either over time or at a point in time.
An entity may recognize revenue over time, if any of the following criteria are met:
the customer simultaneously receives and consumes all of the benefits
provided by the entitys performance as the entity performs;
the customer obtains control of an asset as the asset is created or enhanced
by the entitys performance; or
the entitys performance does not create an asset with an alternative use to
the entity and the entity has an enforceable right to payment for work
completed to date.
Revenue is recognized at a point in time if the criteria for recognizing revenue over
time are not met. Revenue is recognized at a point in time when the entity has
transferred control of the good or service underlying the performance obligation.

[32]

Chapter 4 Supplementary Material

DEVELOPMENT OF FINANCIAL ACCOUNTING AND REPORTING STANDARDS
1929
1933
1934

Stock market crash

Securities Act (sets accounting and disclosure requirements for initial public offering of
securities)
Securities Exchange Act (Applies to secondary market transactions and reporting requirements
for public companies
- Created the Securities and Exchange Commission (SEC) has the power and responsibility to
set accounting and reporting standards for public companies
Securities and Exchange Commission
(FRRs)

Financial Reporting Releases

Early Standard Setting

1938 Committee on Accounting Procedure (CAP)
Bulletins (ARBs)
A committee of American Institute of Accountants
1957

51 Accounting Research
1938 - 1959

Renamed American Institute of Certified Public Accountants

1959-1973 Accounting Principles Board (APB)

Opinions (APBOs)
18-21 Part-time members

31 Accounting Principles Board

Various Interpretations
4 APB Statements

Current Standard Setting

1973 Financial Accounting Standards Board (FASB)
8 Statements of Financial Accounting
Concepts (SFACs)
7 Full-time members
168 Statements of Financial
Accounting Standards (SFASs)
Supported by Financial Accounting Foundation (FAF) FASB Interpretations and Bulletins
1984 Emerging Issues Task Force (EITF)
EITF Issues
Responsible for emerging financial reporting issues
15 members from public accounting and private industry
Global Accounting Standards
1973 International Accounting Standards Committee (IASC)
41 International Accounting
Standards (IASs)
33 SIC Interpretations
2001

International Accounting Standards Board (IASB)

Financial Statements
2002 FASB and IASB signed the Norwalk Agreement

[33]

15 International Financial
Reporting Standards
(IFRSs)
21 IFRIC Interpretations
Conceptual Framework for

Chapter 5
Accounting Research
IMPORTANT NOTE:
This chapter is provided for the purpose of your research project in this course.
5.1 Introduction
Any paper that cites a lot of other accounting papers must be accounting research.
Accounting research is hard to define because it has shifted over time. As a rough
overview, early accounting research (pre-1960s) was mostly normative (i.e.,
argued for the correct accounting treatment, or what should be).
A cynical definition of research is: any paper that cites a lot of other accounting
papers must be accounting research. This quick and dirty definition restricts
accounting research to topics and methodologies that are well established in the
literature; it is safe but somewhat limiting.
Professors typically will choose a subject area and a methodology in which to
focus their efforts. Subject areas include the topical areas considered under the
umbrella term "accounting." These include information systems, auditing and
assurance, corporate governance, financial, forensic, managerial, and tax.
5.2 General Overview of Accounting Research
Academic research looks at how accounting affects the world around us and how
the world affects accounting. Teresa P. Gordon and Jason C. Porter
Accounting research plays an essential part in creating new knowledge. The hard
sciences have produced models of research and testing that can be used and applied
over many disciplines including accounting research. Using these models along
with evidence such as financial statements, stock prices, surveys, experiments,
computer simulations, and mathematical proofs, we can gain a scientific
perspective and basis for the following:

Deciding and implementing new accounting or auditing standards

Presenting unusual economic transactions in the financial statements
Learning how new tax laws impact clients and employers
Discerning how the accounting profession affects the capital markets
through academic accounting research

[34]

Researchers perform two main types of research, positive and normative.

Positive research is the branch of academic research in accounting that seeks to
explain and predict actual accounting practices.
Normative research, in contrast, seeks to derive and prescribe "optimal"
accounting standards.
Researchers use the scientific method to search for cause and effect relationships.
By using the scientific method, the researcher has a systematic model that enables
documentation of their results. The more specific the researcher is in documenting
their methods, the better others will be able to follow and repeat their experiment.
5.3 Accounting Research Topical Areas
Accounting Information Systems (AIS)
Studies which address issues related to the systems and the users of systems
that collect, store, and generate accounting information. Users are defined
broadly to include those involved in collection, storage, or use of accounting
information or even the implementation of the system. These systems may
be electronic or not. Research streams include, but are not limited to design
science, ontological investigations, expert systems, decision aides, support
systems, processing assurance, security, controls, system usability, and
system performance.
Auditing
Studies in which the topical content involves an audit topic. These studies
vary widely and include, but are not limited to, the study of the audit
environmentexternal and internal, auditor decision making, auditor
independence, the effects of auditing on the financial reporting process, and
auditor fees.
Financial
Studies that address the topical content of financial accounting, capital
markets, and decision making based on financial accounting information.
Managerial
Studies that examine issues regarding budgeting, compensation, decisionmaking within an enterprise, incentives, and the allocation of resources
within an enterprise.
Tax
Studies that examine issues related to taxpayer decision-making, tax
allocations, tax computations, structuring of accounting transactions to meet
tax goals, tax incentives, or market reactions to tax disclosures.

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5.4 Accounting Research Methodologies

A researcher will select a methodology to determine how the research is to be
conducted. There are three main methodologies for research in accounting:
archival, analytical, and experimental.
One thing to avoid when discussing methodologies is to refer to one of the
methods as "empirical" to differentiate from other methods. This is most often
done by archival researchers who refer to their research as empirical and not to
include experimental research under the "empirical umbrella." Empirical research
is research that is verifiable based on observation or experimentation; thus,
archival and experimental researches are both empirical in nature.
Analytical
Researchers who utilize analytical methods base analysis and conclusions on
formally modeling theories or substantiated ideas in mathematical terms.
These analytical studies use math to predict, explain, or give substance to
theory.
Archival
Researchers who utilize archival methods base analysis and conclusions on
objective data collected from repositories of third parties. Also included are
studies in which the researchers collected the data and in which the data has
objective amounts such as net income, sales, fees, etc.
Experimental
Researchers who utilize experimental methods base analysis and conclusions
on data the researcher gathered by administering treatments to subjects.
Usually these studies employed random assignment; however, if the
researcher selected different populations in an attempt to manipulate a
variable, we also included these as experimental in nature (e.g., participants
of different experience levels were selected for participation). Experimental
research can include analyzing both economic and behavioral factors.
Other Research Methodologies
Studies that did not fit into one of the other methodological categories. The
methodologies in these studies vary significantly and include such things as
surveys, case studies, field studies, simulations, persuasive arguments, etc.
5.5 Skills necessary to be a successful researcher
Some of the skills necessary to become a successful researcher include the
following:

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The ability to know and stay abreast of current work within your field of
research Staying abreast of the research being performed and the publication of
such work, is important as you further your own research, discover new questions
and problems and contribute to your fellow researchers. Being involved with
workshops and peer reviews, as well as working with fellow professors and
reading the publications in the peer journals are some ways in which to stay abreast
of the current work in the industry.
The ability to understand and recognize research problems Researchers need
not only stay abreast of current research being performed and published, they also
need to understand and recognize difficulties in performing their own research or
that of research performed by others.
The ability to understand research content The ability to read and understand
the content of research articles is an important skill for academics and practitioners
alike.
The ability to discern a topic that will add knowledge to the field and trigger your
interests is a great strength Additionally, being able to evaluate the causality,
strength, and validity of your research is important, not only when initially writing
it, but to return and re-evaluate later and see if it needs to be edited or expanded.
The ability to master appropriate experimental, mathematical, and
computational research skills It is necessary to build a strong base of
mathematical and statistical tools to be able to draw on and enable you to build
experiments that have good construct and internal validity.
The ability to think critically and analytically As you perform research, the
ability to examine assumptions, assess evidence, discern hidden values, and
evaluate the conclusion will be greatly utilized. Additionally, the ability to break a
concept or paradigm into its constituent parts and then study the parts and find and
evaluate the relationships between those parts is also a skill that will further your
research goals.
The ability to document and report your work After the data is gathered and
analyzed and conclusions are developed and confirmed, the researcher needs the
ability to effectively communicate their work in a paper such as a thesis paper. The
documenting of others who have worked in similar areas, contributed to your
work, or you have used to further your research is important.
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The ability to communicate and defend a coherent argument to interested parties

Effective communication includes not only written papers, but the ability to
address and defend your work in a public setting that includes fellow researchers
and practitioners. To take criticism with a view to improve your work and
strengthen the field is desirable.
The ability to critically review the worth of your own work and the works of other
researchers A researcher needs to be able to critically review their own work as
well as the work of others and assess the strengths and weaknesses of it. Determine
if there is a causal relationship and to assess the various types of validity. See if
there is strong enough internal validity the strength of the controlled experiment.
Evaluate the construct validity is what is being measured actually capture the
ideas and events in the hypothesis. Is there good statistical conclusion validity
when everything else is in place, is there strong enough evidence to prove an actual
difference. And finally external validity, now that we have proven that this is valid
in this situation, how does it transfer to other situations and other subjects. These
are a few of the concepts to analyze the strength of your own work as well as the
strength of your fellow researchers work.

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Chapter 6
Code of Ethics and Professionalism in Accounting

6.1 Are Ethics Important For Professional Accountants?

Ethics in professional accountancy are of utmost importance. Now as the business
and financial world is adopting international accounting and auditing standards, it
is becoming all the more necessary to adhere to certain Code of Ethics prescribed
by international and national accountancy bodies. Before arguing in favour of the
topic, let's have a look at some basic concepts:
6.1.1 Profession
A profession is an occupation that requires extensive training and the study and
mastery of specialized knowledge, and usually has a professional association,
ethical code and process of certification or licensing; for example engineering,
medicine, social work, teaching, law, finance, the military, nursing and
Accountancy etc. Classically there were only three professions: military, medicine
and law. Each of these professions holds to a specific code of ethics and members
are almost universally required to swear some form of oath to uphold those ethics,
therefore 'professing' to a higher standard of accountability. Each of these
professions also provides and requires extensive training in the meaning, value and
importance of its particular oath in practice of that profession.
6.2 Accountant
Practitioner of Accountancy is known as Accountant. Qualified Accountant,
Accountant, Professional Accountant or Accountancy Practitioner is a legally
certified accountancy and financial expert. Accountants not only work in public
practice but many of them are working within private corporations, in financial
industry and in various government bodies. Accountancy (profession) or
accounting (methodology) is the measurement, disclosure or provision of
assurance about financial information that helps managers, investors, tax
authorities, lenders and other stakeholders and decision makers to make resource
allocation and policy making decisions.
6.2.1 Role of Professional Accountants
Accountants are independent business advisors. Accountants can offer an extensive
range of services. Accountants can be registered auditors, can set up client's
accounting systems, can be an advisor on tax planning, or a detector of frauds and
embezzlements, can do budgeting and financial statement analysis, advise clients
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on financing decisions, provide specialist knowledge and can help maintaining an

ethical environment.
After discussing the basic concepts and role of professional accountants we are in a
better position to ponder on what professional ethics is and why it is important in
the field of accountancy.
6.2.2 Accounting Certifications
Both aspiring accountants and accounting professionals know that continuing their
education will help their career. Accounting professionals who continue their
education are more likely to get job offers, salary raises and promotions.
Statutory accountancy qualifications: Top-tier accounting certifications
Certified Public Accountant (CPA) is the title of qualified accountants in numerous
countries in the English-speaking world. While requirements differ from country to
country in general you must hold a bachelors degree in finance or accounting to
qualify for the Uniform CPA Examination. To become a CPA, you will have
passed the examination and will have to meet additional education and experience
requirements. As a certified public accountant you will be responsible for
maintaining the competitive edge of your company by ensuring financial integrity.
In the UK, there is no licence requirement for individuals to describe themselves or
practise as an accountant (except for audit or insolvency work). However, to use
certain titles require membership of the appropriate professional body such as
British qualified accountants including Chartered Certified Accountant (ACCA or
FCCA) and Chartered Accountant (CA, ACA or FCA).
The chartered bodies admit members only after passing examinations and
undergoing a period of relevant work experience. Once admitted, members are
expected to comply with ethical guidelines, gain appropriate professional
experience and undergo continuing professional development. The other bodies
recognise academic qualifications and work experience. Most bodies offer
Fellowship after five or ten years' further experience in good standing as an
Associate member.
Non-statutory accountancy qualifications
Certified Management Accountant (CMA) certification is a professional credential
that can be earned in the advanced management accounting and financial
management field. The certification signifies that the person possesses knowledge
in the areas of financial planning, analysis, control, decision support, and
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professional ethics, the skills most in demand on finance teams around the world.
The CMA is a U.S.-based, globally recognized certification offered by IMA (The
Institute of Management Accountants)
Certified Internal Auditor (CIA) is the primary professional designation offered by
The Institute of Internal Auditors (IIA). The CIA designation is a globally
recognized certification for internal auditors and is a standard by which individuals
may demonstrate their competency and professionalism in the internal audit field.
Earning the CIA qualification is intended to demonstrate a professional knowledge
of the internal audit profession. CIAs are required to take continuing education
courses. Many CIAs today are senior internal audit managers, Vice Presidents,
Directors and Chief Audit Executives in top global MNC companies driving
internal audit functions in their respective companies.
Other certificates offered by the IIA include:
Certification in Control Self-Assessment (CCSA)
Certified Government Auditing Professional (CGAP), for Government
performance auditing and Government Auditors
Certified Financial Services Auditor (CFSA)
Certification in Risk Management Assurance (CRMA)
Qualification in Internal Audit Leadership (QIAL)
Certified Information Systems Auditor (CISA) is a globally recognized certification
in the field of audit, control and security of information systems. CISA gained
worldwide acceptance having uniform certification criteria, the certification has a
high degree of visibility and recognition in the fields of IT security, IT audit, IT
risk management and governance. Vacancies in the areas of IT security
management, IT audit or IT risk management often ask for a CISA certification.
The exam tends to be associated with a high failure rate. CISA is awarded by
Information Systems Audit and Control Association (ISACA).
Certified Fraud Examiner (CFE) is a credential awarded by the Association of
Certified Fraud Examiners (ACFE). The ACFE association is the world's largest
anti-fraud organization and premier provider of anti-fraud training and education.
The ACFE is reducing business fraud world-wide and inspiring public confidence
in the integrity and objectivity within the profession. CFEs have a unique set of
skills that are not found in any other career field or discipline; they combine
knowledge of complex financial transactions with an understanding of forensic
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methods, law, and how to resolve allegations of fraud. Fraud examiners are also
trained to understand not only how fraud occurs, but why.
Chartered Financial Analyst (CFA) is a professional credential offered
internationally by the American-based CFA Institute to investment and financial
professionals. A candidate who successfully completes the program and meets
other professional requirements is awarded the "CFA charter" and becomes a
"CFA charter holder".
There are numerous accounting certifications that you can get as an accounting and
finance professional. The ones I listed above is the leader in their respected fields.

Certified Bank Auditor (CBA)

Certified in Financial Forensics (CFF)
Certified Payroll Professional (CPP)
Certified Business Appraiser (CBA)
Certified Credit Executive (CCE)
Licensed International Financial Analyst (LIFA)
Certified Financial Planner (CFP)
Accredited in Business Valuations (ABV)
Certified Risk Professional (CRP)
Accredited Business Accountant (ABA)
Certified Quality Auditor (CQA)
Accredited Tax Advisor (ATA)
Accredited Tax Preparer (ATP)
Government Financial Manager (CFGM)
Certified Valuation Analyst (CVA)

6.3 Definition of Ethics

The word 'Ethics' is derived from the Ancient Greek word ethikos; means
customs and habits. A major branch of philosophy which is the study of values and
customs of a person or group and covers the analysis and employment of concepts
such as right and wrong, good and evil and do's and don'ts.
6.3.1 Code of Ethics
In the context of a code adopted by a profession or by a governmental organization
to regulate that profession, an ethical code may be styled as a code of professional
responsibility which may dispense with difficult issues of what behaviour is
'ethical'. A code of ethics is often a formal statement of the organization's values on
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certain ethical and social issues relating to the profession and practice of the
professional knowledge. This also includes the principles and procedures for
specific ethical situations.
6.3.2 Ethics in Professional Accountancy
The general ethical standards of society apply to people in professions such as
medicine, law, nursing and accountancy etc just as much as to anyone else.
However society places even higher expectations on professionals. People need to
have confidence in the quality of the complex services provided by professionals
Ethics in accountancy profession are invaluable to accounting professionals and to
those who rely on their services. Stakeholders including clients, credit grantors,
governments, taxation authorities, employees, investors, the business and financial
community etc perceive them as highly competent, reliable, objective and neutral
people. Professional accountants therefore, must not only be well qualified but also
possess a high degree of professional integrity. Because of these high expectations,
professionals have adopted codes of ethics; also known as codes of professional
conduct. These ethical codes call for their members to maintain a level of selfdiscipline that goes beyond the requirements of laws and regulations. Each of the
major professional association for accountants has a code of ethics.
As mentioned earlier, professional accountants can be of two types. One who work
in firms or independently run those firms that provide accounting, auditing and
other advisory services to clients; these are called public practitioners. Others are
those who are employees of organizations and may serve as internal auditors,
management accountants, financial managers and financial analysts. Regardless of
the role of accountants, they are adhered to code of ethics which are applied to
their professional conduct although there are some special provisions for those in
public practice [Reference: Code of Ethics for Professional AccountantsInternational Federation of Accountants (IFAC)].
6.4 International Federation of Accountants-IFAC
The International Federation of Accountants (IFAC) is a federation of all
accountancy bodies throughout the world. All the major international and national
associations like ACCA, AICPA, ICMA, ICAP, IASB etc are all its member
organizations. The mission of IFAC, as set out in its constitution, is "the worldwide
development and enhancement of an accountancy profession with harmonized
standards, able to provide services of consistently high quality in the public
interest"

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IFAC's International Ethics Standards Board for Accountants (IESBA) maintains

the international Code of Ethics for Professional Accountants to serve as a model
for all codes of ethics developed and used by national accountancy organisations.
The Code applies to all professional accountants, whether they are in public
practice, industry, commerce, the public sector or education. The IESBA also
develops interpretations of the Code of Ethics for Professional Accountants to
address questions that have broad implications.
6.5 Fundamental Principles of Code of Ethics for Professional Accountants
The objective of setting this code of conduct is to harmonize these standards and
practices on a global perspective. Public can only trust these highly professionals
when it is made mandatory to observe and follow strict regulations and codes
throughout the world. A professional accountant is required to comply with the
following fundamental principles mentioned in this Code of Ethics:
Integrity: The principle of integrity imposes an obligation on all professional
accountants to be straightforward and honest in all professional and business
relationships. Integrity also implies fair dealing and truthfulness.
A professional accountant shall not knowingly be associated with reports, returns,
communications or other information where the professional accountant believes
that the information:
Contains a materially false or misleading statement;
Contains statements or information furnished recklessly; or
Omits or obscures information required to be included where such omission
or obscurity would be misleading.
When a professional accountant becomes aware that the accountant has been
associated with such information, the accountant shall take steps to be
disassociated from that information.
Objectivity: The principle of objectivity imposes an obligation on all professional
accountants not to compromise their professional or business judgment because of
bias, conflict of interest or the undue influence of others.
A professional accountant may be exposed to situations that may impair
objectivity. It is impracticable to define and prescribe all such situations. A
professional accountant shall not perform a professional service if a circumstance
or relationship biases or unduly influences the accountants professional judgment
with respect to that service.
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Professional Competence & Due Care: The principle of professional competence

and due care imposes the following obligations on all professional accountants:
a) To maintain professional knowledge and skill at the level required to ensure
that clients or employers receive competent professional service; and
b) To act diligently in accordance with applicable technical and professional
standards when providing professional services.
Competent professional service requires the exercise of sound judgment in
applying professional knowledge and skill in the performance of such service.
Professional competence may be divided into two separate phases:
a) Attainment of professional competence; and
b) Maintenance of professional competence.
The maintenance of professional competence requires a continuing awareness and
an understanding of relevant technical, professional and business developments.
Continuing professional development enables a professional accountant to develop
and maintain the capabilities to perform competently within the professional
environment.
Diligence encompasses the responsibility to act in accordance with the
requirements of an assignment, carefully, thoroughly and on a timely basis.
A professional accountant shall take reasonable steps to ensure that those working
under the professional accountants authority in a professional capacity have
appropriate training and supervision.
Where appropriate, a professional accountant shall make clients, employers or
other users of the accountants professional services aware of the limitations
inherent in the services.
Confidentiality: The principle of confidentiality imposes an obligation on all
professional accountants to refrain from:
a) Disclosing outside the firm or employing organization confidential
information acquired as a result of professional and business
relationships without proper and specific authority or unless there is a
legal or professional right or duty to disclose; and

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b) Using confidential information acquired as a result of professional and

business relationships to their personal advantage or the advantage of
third parties.
A professional accountant shall maintain confidentiality of information disclosed
by a prospective client or employer.
A professional accountant shall maintain confidentiality of information within the
firm or employing organization.
A professional accountant shall take reasonable steps to ensure that staff under the
professional accountants control and persons from whom advice and assistance is
obtained respect the professional accountants duty of confidentiality.
The following are circumstances where professional accountants are or may be
required to disclose confidential information or when such disclosure may be
appropriate:
a) Disclosure is permitted by law and is authorized by the client or the
employer;
b) Disclosure is required by law, for example:
o Production of documents or other provision of evidence in the
course of legal proceedings; or
o Disclosure to the appropriate public authorities of infringements of
the law that come to light; and
c) There is a professional duty or right to disclose, when not prohibited
by law:
o To comply with the quality review of a member body or
professional body;
o To respond to an inquiry or investigation by a member body or
regulatory body;
o To protect the professional interests of a professional accountant in
legal proceedings; or
o To comply with technical standards and ethics requirements.
Professional Behaviour: The principle of professional behaviour imposes an
obligation on all professional accountants to comply with relevant laws and
regulations and avoid any action that the professional accountant knows or should
know may discredit the profession. This includes actions that a reasonable and
informed third party, weighing all the specific facts and circumstances available to
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the professional accountant at that time, would be likely to conclude adversely

affects the good reputation of the profession.
In marketing and promoting themselves and their work, professional accountants
shall not bring the profession into disrepute. Professional accountants shall be
honest and truthful and not:
a) Make exaggerated claims for the services they are able to offer, the
qualifications they possess, or experience they have gained; or
b) Make disparaging references or unsubstantiated comparisons to the
work of others.
ACTIVITY 5: DISCUSSION FORUM
6.6 Ethical Conflict Resolution
A professional accountant may be required to resolve a conflict in complying with
the fundamental principles.
When initiating either a formal or informal conflict resolution process, the
following factors, either individually or together with other factors, may be
relevant to the resolution process:
a) Relevant facts;
b) Ethical issues involved;
c) Fundamental principles related to the matter in question;
d) Established internal procedures; and
e) Alternative courses of action.
Having considered the relevant factors, a professional accountant shall determine
the appropriate course of action, weighing the consequences of each possible
course of action. If the matter remains unresolved, the professional accountant may
wish to consult with other appropriate persons within the firm or employing
organization for help in obtaining resolution.
Where a matter involves a conflict with, or within, an organization, a professional
accountant shall determine whether to consult with those charged with governance
of the organization, such as the board of directors or the audit committee.
It may be in the best interests of the professional accountant to document the
substance of the issue, the details of any discussions held, and the decisions made
concerning that issue.
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If a significant conflict cannot be resolved, a professional accountant may consider

obtaining professional advice from the relevant professional body or from legal
advisors. The professional accountant generally can obtain guidance on ethical
issues without breaching the fundamental principle of confidentiality if the matter
is discussed with the relevant professional body on an anonymous basis or with a
legal advisor under the protection of legal privilege. Instances in which the
professional accountant may consider obtaining legal advice vary. For example, a
professional accountant may have encountered a fraud, the reporting of which
could breach the professional accountants responsibility to respect confidentiality.
The professional accountant may consider obtaining legal advice in that instance to
determine whether there is a requirement to report.
If, after exhausting all relevant possibilities, the ethical conflict remains
unresolved, a professional accountant shall, where possible, refuse to remain
associated with the matter creating the conflict. The professional accountant shall
determine whether, in the circumstances, it is appropriate to withdraw from the
engagement team or specific assignment, or to resign altogether from the
engagement, the firm or the employing organization.

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