1.1 Standards Setting for Financial Accounting Flashcards
What is the nature of financial accounting? (2)
- produce informational reports on assets, liabilities, revenues, expenses & other financial statement elements
- must be equal to GAAP to be useful
What is the primary method of communication in financial accounting?
Financial statements (P&L, balance sheet and cash flow statement
Identify the 4 designated bodies that issue GAAP pronouncements designated by the AICPA council:
- Financial Accounting Standards Board (FASB)
- International Accounting Standards Board (IASB)
- Governmental Accounting Standards Board (GASB)
- Federal Accounting Standards Advisory Board (FASAB)
How does management accounting differ from financial accounting? (4)
Management accounting:
- assist management decision making, planning & control
- primarily for internal use
- does not follow GAAP
- derived from financial accounting records
What authoritative body is responsible for establishing financial reporting requirements for publicly traded companies (issuers)?
SEC - but has delegated this authority to the FASB
How does the SEC reporting requirements assist investors or the general public?
enable investors and the public to evaluate investments for themselves
How does the SEC enforce principles or demands?
by maintaining periodic reporting requirements for financial information disclosure and other information
What is the Financial Accounting Foundation (FAF) and what authority does it have?
- 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
What is the Financial Accounting Standards Advisory Council?
advises FASB on priorities, proposed standards and evaluates its performance
What is the Private Company Council?
2
- proposes exceptions to and modifications of US GAAP for private companies
- advises FASB on private company issues before new pronouncements are issued
What is the purpose of the Emerging Issues Task Force (EITF) and who created it?
- addresses new and unusual accounting issues
- created by the FASB
How does the FASAC, PCC and EITF affect US GAAP?
affect GAAP indirectly by advising and submitting proposals to the FASB
What is the Financial Accounting Standards Board (FASB)?
- standard setter for US GAAP to be applied by nongovernmental entities
Identify the law that authorized the SEC to recognize the FASB as the standard setter for US GAAP?
Sarbanes Oxley Act of 2002 (SOX’02)
Identify the FASB 7 step due process procedure before issuing final pronouncements:
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
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)?
a majority of the 7 board members
When does an ASU have the status of GAAP?
when it has been incorporated into the FASB’s ASC
Identify the 2 authoritative sources of financial accounting guidance
1 - ASC
2 - SEC pronouncements
What is the International Accounting Standards Board (IASB)?
independent, private-sector body that develops and approves International Financial Reporting Standards (IFRS)
Identify the 3 benefits of a single set of global standards
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
IASB guidance is authoritative or equal IFRS in the form of what 3 standards?
1 - International Financial Reporting Standards
2 - International Accounting Standards
3 - Standing Interpretation Committee Standards
When do IFRS become binding?
When they are adopted by national authorities
What is GASB?
- Governmental Accounting Standards Board
- primary standard setter for state & local governmental entities
- has status of GAAP for state & local governments
Does GASB establish GAAP for the federal government?
No - FASAB establishes standards for the federal government
Who established GASB?
Financial Accounting Foundation (FAF)
What does FASAB stand for?
Federal Accounting Standards Advisory Board
Who does the FASAB establish standards for?
the federal government
What does the FASAB issue?
issues Statements of Federal Financial Accounting Standards
True / False:
The Securities and Exchange Commission (SEC) establishes GAAP for U.S. issuers.
False
- FASB establishes GAAP for U.S. issuers
- SEC enforces those principles by ensuring issuers meet certain periodic reporting requirements
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.
False
- IASB issued the 230 -page IFRS for Small and Medium-Sized Entities
