1.1 Standards Setting for Financial Accounting

Question 1

What is the nature of financial accounting? (2)

Answer 1

• produce informational reports on assets, liabilities, revenues, expenses & other financial statement elements
• must be equal to GAAP to be useful

Question 2

What is the primary method of communication in financial accounting?

Answer 2

Financial statements (P&L, balance sheet and cash flow statement

Question 3

Identify the 4 designated bodies that issue GAAP pronouncements designated by the AICPA council:

Answer 3

• Financial Accounting Standards Board (FASB)
• International Accounting Standards Board (IASB)
• Governmental Accounting Standards Board (GASB)
• Federal Accounting Standards Advisory Board (FASAB)

Question 4

How does management accounting differ from financial accounting? (4)

Answer 4

Management accounting:

• assist management decision making, planning & control
• primarily for internal use
• does not follow GAAP
• derived from financial accounting records

Question 5

What authoritative body is responsible for establishing financial reporting requirements for publicly traded companies (issuers)?

Answer 5

SEC - but has delegated this authority to the FASB

Question 6

How does the SEC reporting requirements assist investors or the general public?

Answer 6

enable investors and the public to evaluate investments for themselves

Question 7

How does the SEC enforce principles or demands?

Answer 7

by maintaining periodic reporting requirements for financial information disclosure and other information

Question 8

What is the Financial Accounting Foundation (FAF) and what authority does it have?

Answer 8

• independent body established in 1972
• oversees 4 bodies involved in establishment of US GAAP for nongovernmental entities:
  1. FASAC - Financial Accounting Standards
  Advisory Council
  2. PCC - Private Company Council
  3. EITF - Emerging Issues Task Force
  4. FASB - Financial Accounting Standards Board

Question 9

What is the Financial Accounting Standards Advisory Council?

Answer 9

advises FASB on priorities, proposed standards and evaluates its performance

Question 10

What is the Private Company Council?

2

Answer 10

• proposes exceptions to and modifications of US GAAP for private companies
• advises FASB on private company issues before new pronouncements are issued

Question 11

What is the purpose of the Emerging Issues Task Force (EITF) and who created it?

Answer 11

• addresses new and unusual accounting issues

- created by the FASB

Question 12

How does the FASAC, PCC and EITF affect US GAAP?

Answer 12

affect GAAP indirectly by advising and submitting proposals to the FASB

Question 13

What is the Financial Accounting Standards Board (FASB)?

Answer 13

• standard setter for US GAAP to be applied by nongovernmental entities

Question 14

Identify the law that authorized the SEC to recognize the FASB as the standard setter for US GAAP?

Answer 14

Sarbanes Oxley Act of 2002 (SOX’02)

Question 15

Identify the FASB 7 step due process procedure before issuing final pronouncements:

Answer 15

1 - identification of financial issues
2 -analysis of info & decides to add project to technical agenda
3 - deliberation of issues occur @ public meeting
4 - exposure draft published to solicit broad stakeholder responses (discussion paper may also be issued @ an early stage to seek input)
5 - public meeting regarding exposure draft held if needed
6 - analyses of info obtained in preceding steps
7 - FASB votes on final draft proposal

Question 16

How many approvals are needed during vote on final draft proposal to amend the Accounting Standards Codification (ASC) and issue an Accounting Standards Update (ASU)?

Answer 16

a majority of the 7 board members

Question 17

When does an ASU have the status of GAAP?

Answer 17

when it has been incorporated into the FASB’s ASC

Question 18

Identify the 2 authoritative sources of financial accounting guidance

Answer 18

1 - ASC

2 - SEC pronouncements

Question 19

What is the International Accounting Standards Board (IASB)?

Answer 19

independent, private-sector body that develops and approves International Financial Reporting Standards (IFRS)

Question 20

Identify the 3 benefits of a single set of global standards

Answer 20

1 - multinational companies do not have to rewrite statements or perform complex reconciliations to local GAAP for trading

2 - foreign investment is easier

3 - lower cost of capital

Question 21

IASB guidance is authoritative or equal IFRS in the form of what 3 standards?

Answer 21

1 - International Financial Reporting Standards
2 - International Accounting Standards
3 - Standing Interpretation Committee Standards

Question 22

When do IFRS become binding?

Answer 22

When they are adopted by national authorities

Question 23

What is GASB?

Answer 23

• Governmental Accounting Standards Board
• primary standard setter for state & local governmental entities
• has status of GAAP for state & local governments

Question 24

Does GASB establish GAAP for the federal government?

Answer 24

No - FASAB establishes standards for the federal government

Question 25

Who established GASB?

Answer 25

Financial Accounting Foundation (FAF)

Question 26

What does FASAB stand for?

Answer 26

Federal Accounting Standards Advisory Board

Question 27

Who does the FASAB establish standards for?

Answer 27

the federal government

Question 28

What does the FASAB issue?

Answer 28

issues Statements of Federal Financial Accounting Standards

Question 29

True / False:

The Securities and Exchange Commission (SEC) establishes GAAP for U.S. issuers.

Answer 29

False

• FASB establishes GAAP for U.S. issuers
• SEC enforces those principles by ensuring issuers meet certain periodic reporting requirements

Question 30

True / False:
A major objection to the adoption of IFRS is that small businesses must expend resources complying with burdensome regulations designed for large corporations.

Answer 30

False

- IASB issued the 230 -page IFRS for Small and Medium-Sized Entities