1-2 Key Organizations That Determine GAAP Flashcards
GAAP
Procedures intended to ensure that external financial statements are relevant and faithfully representational
Who are the drivers of GAAP?
AICPA
SEC
FASB
“Generally Accepted”
Principle was established by a designated rule making body (FASB or AICPA) or achieved through practice
Where has most of the development of GAAP taken place?
In the private sector
Securities and Exchange Commission (SEC)
The governmental entity established in 1934 that has regulatory power over the accounting standards process
What were two outcomes of the 1929 stock market crash?
The Securities Act of 1933
The Securities Exchange Act of 1934
Securities Act of 1933
Requires that investors receive financial information about securities held for sale in the public
Securities Act of 1934
The SEC was created
Form S-1
Registration statement filed when securities are initially issued
Form 10-K
Annual audited report
Form 10-Q
Unaudited quarterly report
Form 8-K
Reported following the occurrence of a major event such as changing the company’s auditor
What is the objective of the SEC?
To ensure that the investor community has adequate information to make investment decisions
What makes the FASB more effective than its predecessors?
Small size, financial independence, reporting autonomy, board representation, staff support, service continuity
How many voting members does the FASB have?
7
How is the FASB financed?
Fees paid by publicly traded companies
Can FASB members work somewhere else?
No
Are members of the FASB required to be CPAs?
No
What was the major event that caused the Sarbanes-Oxley Act to be passed?
Enron and Arthur Andersen collapsed
What did SOX enforce?
PCAOB
Executives must certify that the financial statements are reported fairly
Auditors cannot do non-audit services for the same firm
Internal controls/assessments
Audit committee on the Board of Directors cannot be affiliated with the company
SEC performs periodic checks of public companies
AICPA
No longer develops GAAP (since 1973)
Establishes standards for audits of private companies, enforces code of ethics, provides educational guidance, makes/grades the CPA Exam
Due Process for New Standards (FASB)
- Identify Topic
- Make Agenda Decision
- Deliberate at Public Meeting
- Issue Document for Public Comment
- Host Public Hearings ZXCVBNgdsfaERTWYQ3d on Comments
- Issue Final Standard
Why is the development of GAAP a complex and difficult task?
Differing perspectives/ friction between the preparers and users
International Accounting Standards Board (IASB)
Independent, private-sector organization (established in 2001)
Develops IFRS
International Financial Reporting Standards (IFRS)
Set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles (157 countries are under their jurisdiction)
What is one of the major differences between GAAP and IFRS?
GAAP is more rules based (materiality: 20%)
IFRS is more principles based (materiality: no specific threshold)
As early as 2002, the FASB and the IASB expressed a commitment to….
Converge, or remove differences, IFRS and GAAP to allow comparability of companies across regions
What is one of the convergence success stories?
The adoption of the revenue recognition standards
In a report issued in July 2003, as a result of the SOX Act, the SEC recommended that the FASB follow…
An objectives-oriented approach
Objectives-Oriented Approach
More in line with a principles-based system
Improved conceptual framework that guides FASB, explain objective of each standard, sufficient detail/consistent application, minimize exceptions, avoid concrete tests
What is one application of the move towards objective-oriented standards?
Development of a revised revenue recognition standard by the FASB, new single revenue standard replaced multitude of industry specific revenue standards disbursed across the codification
Relationship of Preparers, Auditors, and Users
Preparers (companies) are responsible for developing their financial reports. These reports are audited by the auditor to provide a reliability check to the user.
To be useful, financial information must be…
Objective and Reliable
Complexity creates…
Dilemmas
Professional organizations such as the AICPA and IMA maintain a…
Code of Ethics (that offer guidance for members facing ethical dilemmas)
What is an accountant’s ultimate responsibility?
To the public
What are the responsibilities of an accountant in an ethical dilemma?
- Recognize the ethical issue present
- Try to identify costs/alternatives
- Reflect and evaluate
Recognition assumes…
A sensitivity that is developed from experience
