Ch6 US GAAP Accounting

Question 1

True or false?

Financial reporting and disclosure regulation has a long history in the
US; strict rules for the financial reporting and disclosure of exchangetraded companies have been in place since the end of the civil war.

Answer 1

False (it was much later, after the great depression in 1933/34 with the Securities Exchange Act -> led to creation of SEC)

Question 2

True or false?

During the early 1900s, frequent bank runs and stock market panics
added to economic uncertainty.

Answer 2

True

Question 3

True or false?

Following financial disclosure requirements of the NYSE, already in the 1920s all listed companies disclosed full sets of financial statements, i.e., balance sheets, P&L, and cash flow statements

Answer 3

False (regulation came in 1933/34)

Question 4

True or false?

The 1933 Securities Act and 1934 Securities Exchange Act aim to
protect investors by regulating financial reporting and disclosure

Answer 4

True (investors were the primary focus)

Question 5

True or false?

In the early 2000s, the FASB and the IASB closely coordinated their
work, with the aim to make the existing financial reporting standards
fully compatible

Answer 5

True

Question 6

What statement best describes the role and status of the
FASB?

A) The FASB is a federal agency established in 1934 that oversees and
regulates securities markets and its participants

B) The FASB is a private organization founded in 1973 which is tasked
with establishing and improving financial accounting and reporting

C) The FASB is a federal agency founded in 1973 which is tasked with
establishing and improving financial accounting and reporting

D) The FASB is a private organization established in 1934 that oversees
and regulates securities markets and its participants

Answer 6

B) is correct (for companies that follow Generally Accepted Accounting Principles (GAAP) in the U.S). Founded in 1973

• FASB is not a federal/ gov. agency, but a private org.

Question 7

The FASB Conceptual Framework

A) The FASB framework and the IASB framework differ fundamentally
from each other, there is little common ground between the two.

B) The FASB framework was developed by the FASB in the 1980s and
1990s. Based on the early work of the FASB, the IASB then
developed a new framework in the early 2000s. Thus, the FASB
framework is the more traditional framework, while the IASB
framework is the more modern framework.

C) FASB framework and the IASB framework are generally quite similar,
and some parts of the FASB framework and the IASB framework are
even identical because they were jointly developed by both
standards setters.

D) The FASB framework and the IASB framework are identical because
the two frameworks were completely jointly developed by both
standards setters.

Answer 7

C) is correct. Both were developed separately, they have converged over time through joint efforts to harmonize accounting standards globally.

Question 8

Briefly describe the 1933 Securities Act and the 1934 Securities
Exchange Act and put them into the historical context.

Answer 8

1933 SA:
- regulates the distribution of securities to public investors by creating registration and liability provisions to protect investors
- every security offering is required to be registered with the SEC

1934 SEA:
- issuers must regularly disclose information to the SEC and investors
- regulates insider trading -> insiders must disclose their ownership and report transactions within set timeframes (section 16)

Question 9

Name three areas where US GAAP and IFRS differ and briefly explain
their differences

Answer 9

• Fair presentation override principle:
  IAS 1, para. 17, requires companies to deviate from IFRS if strict application of the standards would not result in a fair presentation; such a rule does not exist in US GAAP.
• Inventories:
  US GAAP uses Last In, First Out (LIFO) method for inventory valuation; in IFRS, LIFO is not allowed.
• Property, plant & equipment:
  IFRS gives firms the option between cost and revaluation model; under US GAAP, firms must apply the cost model, revaluation is not allowed.
• Intangible assets:
  IFRS requires capitalization of development costs as assets, when certain criteria are met; this is not allowed in US GAAP; also: IFRS gives firms the option between cost and revaluation model when the asset
  is traded in an active market; under US GAAP, revaluation is not allowed.
• Business combinations, goodwill impairment:
  in 2020, the FASB tentatively decided to
  reintroduce the amortization of goodwill; in 2020, the IASB tentatively decided not to do so;
  in July 2022, the FASB decided to remove goodwill accounting from its technical agenda.