(Just a reminder that my new book, 100 Conversation Starters to Develop Student Critical Thinking in Intermediate and Financial Accounting Courses, is available as a free download at https://scholarship.richmond.edu/bookshelf/400/ )
**
I have already written my fall semester students 2-3 times just to touch base and send them some information to
ponder. This morning I sent them the
first problem we will discuss this semester.
There is something about seeing a class problem (especially a bizarre
class problem) that makes the semester begin to come alive. It usually catches their attention. Below is the email in its entirety. Can you see how many things I am trying to
accomplish with this one email? Not
every student will read it carefully but many will and this is the start of getting
them intrigued about what we are going
to accomplish this semester.
**
7/20/2026
To: Accounting 302 Students
From: JH
Our class starts in five weeks from today. If
you are half as excited as I am, this will be the greatest class of your
life. So, one of your responsibilities is to be at least half as excited
as I am. Your attitude is up to you. Be bored and you'll hate
this class. Be grumpy and you'll hate this class. Be intrigued, be
interested, be ambitious, be willing to take a chance, and you'll love this
class.
I suspect everyone knows that I use the Socratic Method
exclusively. In other words, I call on people because I am curious as to
what they think and how they will respond.
Before they attend my class, students often react with
terror to the idea that they will be called on. I’ve had students change
majors rather than face the “brutality” of being called on in class.
I could understand this fear if you were all 9 years
old. However, you are all adults. Being called on for your thoughts
and ideas during a business meeting should be an experience you crave. My
class is the same. I hope that you want to be part of the action and not
a mere spectator.
One student in one of my recent student evaluations wrote,
“I think the Business School should make cold calling a mandatory part of every
class.” I have no idea who wrote that but I would suspect it was a
student who came to realize the importance of being actively engaged.
If I had one piece of advice, it would be, “Don’t let your
fears lock you down and prevent you from trying. I realize that we all
hold a self-perception that begins with the words, ‘I cannot do that’” but I
promise you that I will not embarrass you or make fun of you. I just want
to hear what you think.
Here is one of the first questions that I will ask you when
the semester gets started. “Company A has a debt to a bank. Company
A is reporting its financial statements for December 31, 1972, and the year
then ending. The financial statements need to be in conformity with
U.S. Generally Accepted Accounting Principles (US GAAP). The
financial statements will be released on February 12, 1973. The debt
comes due on April 1, 1973. The debt might be paid with $200,000 in cash,
or the debt might be paid with 10 acres of land that are worth
$200,000. On 12/31/1972, should the debt be reported as a current
liability or a noncurrent liability?”
The reason I’m setting this question in 1972 is that FASB
was created in 1973, so at the time of this question, rules were pretty
slim. How, then, at that time, is the independent auditor able to
assert that the reporting is “presented fairly in conformity with U.S.
GAAP”? That’s always our goal.
Why was there no direct accounting rule for this particular
question in 1972?
Coming out of World War II, the American economy (and the
world economy) heated up quickly. The stock market, which had been
practically nonexistent during the Great Depression became much more important
as people started investing in all those newly thriving companies.
At that time, there were mostly accounting principles (such
as conservatism and matching expenses with revenues) rather than a lot of hard
and fast rules. During the 1950s, U.S. GAAP was a squishy concept.
In most cases, U.S. GAAP was pretty much what companies were able to justify.
From the late 1950s until the early 1970s, the Accounting
Principles Board was a part-time board of public accountants (they all had
other jobs that took up much of their time) who met periodically and created
about 3 rules per year on major areas such as computing earnings per share or
recognizing income taxes. U.S. GAAP slowly started to become more
substantial. That was a nice start but a very slow process considering
how fast companies were growing and how complex financial reporting was
becoming (and how very much money was involved).
Probably not surprisingly, there were a lot of accounting
scandals around this time that raised the question, “Can accountants be trusted
to create a legitimate set of accounting rules or should we turn the process
over to the government?” In 1973, the Accounting Principles Board was
killed and replaced by a free-standing group (they raise money from a lot of
sources so that they can say that they are truly independent) known as the
Financial Accounting Standards Board or FASB. The board members
were full-time and paid well to create sound accounting rules. They took
a long time and studied each possible new rule carefully. Rules were
passed and if they worked well they are still in existence today. If they
didn’t work well, they were replaced or modified or expanded. As you
would expect, FASB focused on those areas of financial reporting that seemed to
cause the most problems. Few companies have gone bankrupt because of
Prepaid Rent so FASB hasn’t spend time on Prepaid Rent. Over the decades,
accounting principles became less important (conservatism which once ruled
accounting is no longer nearly as important) as more rules were created.
Over the years, the Emerging Issues Task Force was formed to
provide quick answers to newly-developing problems that were being
encountered. The EITF did not create U.S. GAAP but, rather, would tell
people which parts of the accounting rules should be applied to specific
situations. If FASB liked that, it left the EITF advice in place.
If FASB didn’t like that, it would put the topic on its agenda to be studied.
GASB was eventually formed to create U.S. GAAP for state and
local governments.
FASB (after a big debate with GASB) took over the
rule-making for private not-for-profit entities (such as charities).
Special rules were created for private businesses as
alternatives for those required of publicly-held businesses.
Concepts statements was produced that did not provide any
rules at all but served as a theoretical foundation for the application of
rules and principles.
Eventually, there were so many rules that FASB had to
created the ASC (the Accounting Standards Codification) to provide an
organizational structure for all those rules.
So, if the original question is, “Should the debt at the
beginning of this essay be a current liability or a noncurrent liability if
reported in 1972?” you have to figure out a logical answer based on a strong
understanding of U.S. GAAP at that time. Because of the evolution
of U.S. GAAP, I suspect one answer would have been prevalent in 1972, a
different answer would have been prevalent 10 years later, and even another
answer would have been prevalent 20 years later.
In class at our first class of the semester, we’ll try to
figure out what an appropriate answer to this reporting question would have
been in 1972. In subsequent classes, we might change that answer
based upon changes in time. Evolution happens, especially in US GAAP.
However, at no time is it easy to find a specific answer for
this question in U.S. GAAP. You have to get the answer by understanding
what U.S. GAAP is telling you AT THAT TIME.
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