Chapter 1

Explain how the financial statements preparers, users, and other interested parties are involved in the standard-setting process for U.S GAAP?

Accounting standard setters follow a process to set accounting standards that involves financial statement preparers, users and other interested parties at several stages. - In identifying issues to consider by the FASB, standard setters consider input from these parties. - Once an issue is added to the technical agenda, standard setters usually have public meetings where they seek comments from these interested parties. - When an exposure draft is issued, interested parties are invited to prepare comment letters. - After an exposure draft is issued, standard setters sometimes hold roundtables, or public forums, which include these various parties. - When deliberating on an issue before publishing a final standard, the standard setters consider the inputs obtained from outside parties at the various stages in the standard setting process. The IASB uses a similar process.

Economic entities

An economic entity is an organization or unit with activities that are separate from those of its owners and other entities. Economic entities can, for example, be corporations, partnerships, sole proprietorships, or governmental organizations. Also, economic entities may be privately held or publicly held.

Creditors

Banks and other financial institutions that lend money to the company.

Internal Auditors

Employees of the company serving in an advisory role to management. They provide information to management regarding the company's operations and proper functioning of its internal controls.

Financial Accounting

Financial accounting is the process of identifying, measuring, and communicating financial information about an economic entity to various user groups within the political, social, legal and economic environment.

Financial information

Financial information includes items such as the financial statements, footnotes to the financial statements, the letter to the owners, management's discussion and analysis, the auditors' report, the management report, and press releases.

External Auditors

Independent of the company and responsible for ensuring that management prepares and issues financial statements that comply with accounting standards and fairly present the financial position and economic performance of the company.

Regulatory Bodies

Protect investors and oversee the accounting and auditing standard setting processes.

Government Agencies

Review the financial statements of publicly traded companies for a variety of reasons that are in the public interest.

Equity Investors

Shareholders of the company.

What is the function of accounting standard setters?

Standard setters create accounting concepts, rules, and guidelines to ensure that financial statements accurately present the economic performance and financial position of a firm. The standards encourage transparent and truthful reporting.

Professional Organizations

Support accounting professionals throughout their careers by providing training, professional skills development, and other resources.

Environment

The environment includes the legal, economic, political, and social factors that shape and influence the financial reporting process.

Employees and Labor Unions

Use financial information during negotiation of new labor agreements and compensation contracts.

Competitors

Use financial information to determine their market position relative to the reporting entity and to attempt to identify future strategies of the reporting entity.

Financial Analyst

Use financial information to review and analyze reported results of the companies they cover and make investment recommendations.

Suppliers and Customers

Use financial statements to determine whether to conduct business or purchase products from a company.

User groups

User groups demand financial information about an economic entity. Users include equity investors, debt investors, creditors, competitors, financial analysts, employees and labor unions, suppliers, customers, and government agencies.

Is the promulgation of financial accounting standards a political process?

Yes, the promulgation of financial accounting standards is a political process. There are several groups that influence the standard setting process. The standard setting process is a political process that is affected by the impact of several lobbying groups. The government, through the SEC, influences accounting standards. The SEC has the authority to issue accounting standards but has assigned this responsibility to the private sector. Nonetheless, the SEC can exert pressure on the FASB to issue accounting standards and veto the standards promulgated by the FASB. Auditing firms, the corporate sector, creditors, financial analysts, the financial community, accounting organizations, industry groups, and investors can influence the FASB by written comments about Exposure Drafts and participation in public meetings and public roundtables regarding a proposed financial reporting standard.

Principle-based accounting standards

consistent with theoretical framework - provide a clear discussion of the accounting objective related to the standard - involve few, if any, exceptions - involve no tests (referred to as bright-line tests) that require a meeting a pre-established numerical threshold - provide insufficient guidance to implement the standards - involve a significant amount of interpretation in application

Rules-based accounting standards

does not necessarily rely on a consistent theoretic framework - contains more specific and prescriptive rules - contain numerous exceptions to the types of firms and industries that are covered by the standard - contain numerous bright-line tests - result in inconsistencies between standards - contain detailed application guidance - do not rely on extensive use of professional judgment result in implementation problems; difficult to interpret from a user perspective; tend to result in an environment where financial reporting is viewed as an act of compliance rather than a process of disseminating transparent financial information to investors and creditors