ACC 301 Chapter 1
FASB'S Due Process System
1. Topics identified and placed on board's agenda 2. Research and analysis conducted and preliminary views of pros and cons issued 3. Public hearing on proposed standard 4. Board evaluates research and public response and issues exposure draft 5. Board evaluates responses and changes exposure draft, if necessary. Final standard issued.
Of what value is a common set of standards in financial accounting and reporting?
A common set of standards applied by all businesses and entities provides financial statements which are reasonably comparable. Without a common set of standards, each enterprise could, and would, develop its own theory structure and set of practices, resulting in noncomparability among enterprises.
general-purpose financial statements
A means of providing financial reporting information to a wide variety of users at the least cost.
Statements of Financial Accounting Concepts
A series of statements by the FASB that set forth fundamental objectives and concepts that the Board uses in developing future standards of financial accounting and reporting. These statements of concepts do not establish GAAP. However, this cohesive set of interrelated concepts is intended to be a conceptual framework that will serve as tools for solving existing and emerging problems in a consistent manner.
decision-usefulness
Approach that requires that financial reporting be useful to investors by helping them assess (1) the company's ability to generate net cash inflows and (2) management's ability to protect and enhance the capital providers' investments.
FASB Staff Positions
Issued by the FASB, these provide interpretive guidance and also minor amendments to standards and interpretations.
The authoritative status of the conceptual framework is as follows.
It is used when there is no standard or interpretation related to the reporting issues under consideration.
Sarbanes-Oxley Act
Legislation, enacted by the U.S. Congress, intended to combat accounting fraud, curb poor reporting practices, and make sweeping changes to the institutional structure of the accounting profession.
General-purpose financial statements are prepared primarily for:
external users.
International Financial Reporting Standards (IFRS)
All the accounting rules accepted for international use, issued by the International Accounting Standards Board.
Financial Accounting Standards Board Codification Research System (CRS)
An online, real-time database that provides easy access to the Codification, through a topically organized structure, subdivided into topics, subtopics, sections, and paragraphs, using a numerical index system.
Committee on Accounting Procedure (CAP)
Committee established by the AICPA in 1939 at the urging of the SEC to deal with accounting problems. The CAP issued 51 Accounting Research Bulletins and was replaced by the Accounting Principles Board in 1959.
Financial Accounting Standards Board Accounting Standards Codification (Codification)
Developed by the FASB, it provides in one place all the authoritative literature related to a particular topic.
Securities and Exchange Commission (SEC)
Federal agency established to help develop and standardize financial information presented to stockholders. It administers the Securities Exchange Act of 1934 and several other acts. Most companies that issue securities to the public are required to file audited financial statements with the SEC. The SEC also has broad powers to prescribe the auditing practices and standards to be employed by companies that fall within its jurisdiction.
Accounting Research Bulletins
Fifty-one bulletins from the Committee on Accounting Procedure (CAP) during the years 1939 to 1959, issued to deal with accounting problems as they arose. Subsequently, the AICPA created the Accounting Principles Board to provide a structured body of accounting principles.
objective of financial reporting
Goal for financial accounting and reporting, established by the accounting profession, which is to provide information about the reporting entity that is useful to present and potential to equity investors, lenders, and other creditors in decisions about providing resources to the entity.
Emerging Issues Task Force (EITF)
Group created in 1984 by the FASB to reach a consensus on how to account for new and unusual financial transactions that might create differing financial reporting practices. The FASB reviews and approves all EITF consensuses, and the SEC views consensus solutions as preferred accounting.
What are the primary advantages of having a Codification of generally accepted accounting principles?
Hopefully, the codification will help users to better understand what GAAP is. If this occurs, companies will be more likely to comply with GAAP and the time to research accounting issues will be substantially reduced. In addition, through the electronic web-based format, GAAP can be easily updated which will help users stay current.
Identify the two committees of the AICPA that established accounting principles prior to the establishment of the FASB.
One of the committees that the AICPA established prior to the establishment of the FASB was the Committee on Accounting Procedures (CAP). The CAP, during its existence from 1939 to 1959, issued 51 Accounting Research Bulletins (ARB). In 1959, the AICPA created the Accounting Principles Board (APB) to replace the CAP. Before being replaced by the FASB, the APB released 31 official pronouncements, called APB Opinions.
Public Company Accounting Oversight Board (PCAOB)
Organization established by the Sarbanes-Oxley Act that has oversight and enforcement authority for accounting practices and that establishes auditing, quality control, and independence standards and rules.
Accounting Principles Board (APB)
Private standard-setting organization from 1959 to 1973, whose mission was to develop an overall conceptual framework. Its official pronouncements, called APB Opinions, were to be based mainly on research studies and be supported by reasons and analysis.
financial reporting
Reporting of financial information other than in formal financial statements. Examples include the president's letter or supplementary schedules in the corporate annual report, prospectuses, reports filed with government agencies, news releases, management's forecasts, and social or environmental impact statements.
Accounting standard-setters use the following process in establishing accounting standards:
Research, discussion paper, exposure draft, standard.
What is Rule 203 of the Code of Professional Conduct?
Rule 203 of the Code of Professional Conduct prohibits a member of the AICPA from expressing an opinion that financial statements conform with GAAP if those statements contain a material departure from an accounting principle promulgated by the FASB, or its predecessors, the APB and the CAP, unless the member can demonstrate that because of unusual circumstances the financial statements would otherwise have been misleading. Failure to follow Rule 203 can lead to a loss of a CPA's license to practice. This rule is extremely important because it requires auditors to follow FASB standards.
interpretations
Statements issued by the FASB that modify or extend existing standards.
Distinguish between FASB Accounting Standards Updates and FASB Statements of Financial Accounting Concepts.
Statements of financial accounting standards contained in Accounting Standards updates constitute generally accepted accounting principles and dictate acceptable financial accounting and reporting practices as promulgated by the FASB. The first standards statement was issued by the FASB in 1973. Statements of financial accounting concepts do not establish generally accepted accounting principles. Rather, the concepts statements set forth fundamental objectives and concepts that the FASB intends to use as a basis for developing future standards. The concepts serve as guidelines in solving existing and emerging accounting problems in a consistent, sound manner. Both the standards statements and the concepts statements may develop through the same process from discussion memorandum, to exposure draft, to a final approved statement.
What is the present role of the AICPA in the rule-making environment?
The AICPA has supplemented the FASB's efforts in the present standard-setting environment. The issue papers, which are prepared by the Financial Reporting Executive Committee (FinREC) formally the Accounting Standards Executive Committee (AcSEC), identify current financial reporting problems for specific industries and present alternative treatments of the issue. These papers provide the FASB with an early warning device to insure timely issuance of FASB standards. In situations where the FASB avoids the subject of an issue paper, FinREC may issue a Statement of Position to provide guidance for the reporting issue. FinREC also issues Practice Bulletins which indicate how the AICPA believes a given transaction should be reported. Recently, the role of the AICPA in standard-setting has diminished. The FASB and the AICPA agreed, that after a transition period, the AICPA and FinREC no longer issues authoritative accounting guidance for public companies.
What was the Committee on Accounting Procedure, and what were its accomplishments and failings?
The Committee on Accounting Procedure was a special committee of the American Institute of CPAs that, between the years of 1939 and 1959, issued 51 Accounting Research Bulletins dealing with a wide variety of timely accounting problems. These bulletins provided solutions to immediate problems and narrowed the range of alternative practices. But, the Committee's problem-by-problem approach failed to provide a well-defined and well-structured body of accounting theory that was so badly needed. The Committee on Accounting Procedure was replaced in 1959 by the Accounting Principles Board.
Indicate the major types of pronouncements issued by the FASB
The FASB issues two major types of pronouncements: Accounting Standards Updates (ASUs) and Concepts Statements. ASUs issued by the FASB are considered GAAP.
If you had to explain or define "generally accepted accounting principles or standards," what essential characteristics would you include in your explanation?
The explanation should note that generally accepted accounting principles or standards have "substantial authoritative support." They consist of accounting practices, procedures, theories, concepts, and methods which are recognized by a large majority of practicing accountants as well as other members of the business and financial community. Bulletins issued by the Committee on Accounting Procedure, opinions rendered by the Accounting Principles Board, and statements issued by the Financial Accounting Standards Board constitute "substantial authoritative support."
Identify the sponsoring organization of the FASB and the process by which the FASB arrives at a decision and issues an accounting standard.
The Financial Accounting Foundation (FAF) is the sponsoring organization of the FASB. The FAF selects the members of the FASB and its Advisory Council, funds their activities, and generally oversees the FASB's activities. The FASB follows a due process in establishing a typical FASB Statement of Financial Accounting Standards. The following steps are usually taken: (1) A topic or project is identified and placed on the Board's agenda. (2) A task force of experts from various sectors is assembled to define problems, issues, and alternatives related to the topic. (3) Research and analysis are conducted by the FASB technical staff. (4) A preliminary views document is drafted and released. (5) A public hearing is often held, usually 60 days after the release of the preliminary views. (6) The Board analyzes and evaluates the public response. (7) The Board deliberates on the issues and prepares an exposure draft for release. (8) After a 30-day (minimum) exposure period for public comment, the Board evaluates all of the responses received. (9) A committee studies the exposure draft in relation to the public responses, reevaluates its position, and revises the draft if necessary. (10) The full Board gives the revised draft final consideration and votes on issuance of a Standards Statement. The passage of a new accounting standard in the form of an FASB Statement requires the support of five of the seven Board members, before it is incorporated in the codification.
In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles and standards?
The SEC has the power to prescribe, in whatever detail it desires, the accounting practices and principles to be employed by the companies that fall within its jurisdiction. Because the SEC receives audited financial statements from nearly all companies that issue securities to the public or are listed on the stock exchanges, it is greatly interested in the content, accuracy, and credibility of the statements. For many years the SEC relied on the AICPA to regulate the profession and develop and enforce accounting principles. Lately, the SEC has assumed a more active role in the development of accounting standards, especially in the area of disclosure requirements. In December 1973, in ASR No. 150, the SEC said the FASB's statements would be presumed to carry substantial authoritative support and anything contrary to them to lack such support. It thereby supports the development of accounting principles in the private sector.
Wheat Committee
The Study Group on Establishment of Accounting Principles, chaired by Francis Wheat, that examined the organization and operation of the Accounting Principles Board and determined the changes needed to attain better productivity and more timely correction of accounting abuses. The Study Group submitted its recommendations to the AICPA Council in the spring of 1972, which adopted the recommendations in total and implemented them by early 1973.
Auditing Standards Board (ASB)
The arm of the AICPA that had been responsible for developing auditing standards. The Public Company Accounting Oversight Board, established by the Sarbanes-Oxley Act, now oversees the development of auditing standards.
generally accepted accounting principles (GAAP)
The common set of accounting standards and procedures, for which either an authoritative accounting rule-making body has established a principle of reporting in a given area, or over time, a given practice has been accepted as appropriate because of its universal application.
For what purposes did the AICPA create the Accounting Principles Board?
The creation of the Accounting Principles Board was intended to advance the written expression of accounting principles, to determine appropriate practices, and to narrow the differences and inconsistencies in practice. To achieve its basic objectives, its mission was to develop an overall conceptual framework to assist in the resolution of problems as they became evident and to do substantive research on individual issues before pronouncements were issued.
expectations gap
The difference between what the public thinks accountants should do and what accountants think they can do.
The Sarbanes-Oxley Act was enacted to combat fraud and curb poor reporting practices. What are some key provisions of this legislation?
The following are some of the key provisions of the Sarbanes-Oxley Act: ● Establishes an oversight board for accounting practices. The Public Company Accounting Oversight Board (PCAOB) has oversight and enforcement authority and establishes auditing, quality control, and independence standards and rules. ● Implements stronger independence rules for auditors. Audit partners, for example, are required to rotate every five years and auditors are prohibited from offering certain types of consulting services to corporate clients. ● Requires CEOs and CFOs to personally certify that financial statements and disclosures are accurate and complete and requires CEOs and CFOs to forfeit bonuses and profits when there is an accounting restatement. ● Requires audit committees to be comprised of independent members and members with financial expertise. ● Requires codes of ethics for senior financial officers. In addition, Section 404 of the Sarbanes-Oxley Act requires public companies to attest to the effectiveness of their internal controls over financial reporting.
American Institute of Certified Public Accountants (AICPA)
The national professional organization of practicing Certified Public Accountants (CPAs), whose various committees and boards have been an important contributor to the development of GAAP.
APB Opinions
The official pronouncements of the Accounting Principles Board, intended to be based mainly on research studies and be supported by reasons and analysis. Between its inception in 1959 and its dissolution in 1973, the APB issued 31 opinions.
International Accounting Standards Board (IASB)
The organization, based in London, that sets accounting standards accepted for international use. Although many of these international standards are similar to GAAP, the FASB and the IASB are currently working on a convergence project to reduce differences between IFRS and GAAP.
financial statements
The principal means through which a company communicates its financial information. These statements reflect the collection, tabulation, and final summarization of the accounting data. The statements most frequently provided are (1) the balance sheet, (2) the income statement, (3) the statement of cash flows, and (4) the statement of owners' or stockholders' equity. Note disclosures are an integral part of a company's financial statements.
Accounting Standards Updates
The products of standard-setting (e.g., FASB standards and EITF consensuses) included in the FASB Codification. The Updates include the background and basis for conclusions for the new pronouncement in a common format, regardless of the form in which such guidance may have been issued. Updates are also issued for amendments to the SEC content in the Codification.
How are FASB preliminary views and FASB exposure drafts related to FASB "statements"?
The technical staff of the FASB conducts research on an identified accounting topic and prepares a "preliminary views" that is released by the Board for public reaction. The Board analyzes and evaluates the public response to the preliminary views, deliberates on the issues, and issues an "exposure draft" for public comment. The preliminary views merely present all facts and alternatives related to a specific topic or problem, whereas the exposure draft is a tentative "statement." After studying the public's reaction to the exposure draft, the Board may reevaluate its position, revise the draft, and vote on the issuance of a final statement.
entity perspective
The view that companies are distinct and separate from their owners (present shareholders).
Key Provisions of SOX
Top management must certify the accuracy of the financial info More severe penalties for fraudulent financial info Expanded independence of outside auditors Stricter oversight regarding the corporation's board of directors
Economic consequences of accounting standard-setting means:
accounting standards can have detrimental impacts on the wealth levels of the providers of financial information.
GAAP is comprised of:
any accounting guidance included in the FASB Codification.
The objective of financial reporting places most emphasis on:
reporting to capital providers.