FASB and Standard Setting and SEC

Question 1

GAAP addresses three aspects of Financial Reporting to aid decision making of External Users

Answer 1

Recognition
Measurement
Disclosure

Question 2

Standard Setting

Answer 2

D before E (Discussion Memo before Exposure Draft

DM then Hearing then ED then modify then ASU

Question 3

FASB

Answer 3

FAF: provides funding and board members
FASAC: advisory on policy issues and agenda items
EITF: implementation guidance

7 Members

Question 4

SEC

Answer 4

Enforces compliance for public US Companies

Four Divisions:

1. Corporate Finance.
2. Enforcement
3. Trading and Markets
4. Investment Management

Pronouncements:
FRR: Financial Reporting Releases (highest Authority)
SAB: Staff Acctg Bulletics (Technical)
AAER: Accounting and Auditing Enforecement

Question 5

SEC Reporting Requirements

Answer 5

1. S-1 (IPO): 2 Years B/S 3 of I/S, O/E, CF (same as 10K)

2. REG S-X: requirements for reporting

Question 6

In reference to proposed accounting standards, the term “negative economic consequences” includes:

Answer 6

A proposed standard may cause firm earnings to fall, for example when they are adopted. Firms will be concerned that lower earnings may make it more difficult to sell stock or to secure loans.
As a result, negative economic consequences become a focal point for arguments against the proposed standard.

Question 7

Objective of New GAAP standards

Answer 7

One of the objectives of the FASB in setting standards is to develop rules that are unbiased. FASB statements generally do not reflect any reporting bias.
For example, the requirement to expense all research and development costs is uniform across all firms and does not favor one firm over another

Question 8

What is the primary protection for investors against fraudulent financial reporting by corporations?

Answer 8

The audit of the financial statements by independent third parties is the primary protection. The auditors do not prepare the information, nor do they have employment ties with either the reporting firm or the intended audience of the financial statements.
However, even the audit of financial statements is not a perfect protection as indicated by the frequency of fraud and audit failure.

Question 9

Updates to ASC are via

Answer 9

Changes and updates to the Codification are accomplished through Accounting Standards Updates (ASUs).

Question 10

NOT included in Acctg Guidance under GAAP

Answer 10

IFRS are not U.S. GAAP and thus are not included in the Codification.

Question 11

Codification includes

Answer 11

The Codification significantly changes how U.S. GAAP is organized and accessed and includes all authoritative GAAP for nongovernmental entities except for publicly traded firms. It also contains a significant amount of SEC guidance for publicly traded firms.

Question 12

SEC Mission

Answer 12

The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

In order to carry out the mandates in the Securities Act of 1933, the SEC is ensuring that investors are provided with adequate information on which to base investment decisions. www.SEC.gov, What We Do.

Question 13

Foreign Private Issuer

Answer 13

A foreign private issuer is any foreign issuer other than a foreign government, except an issuer that meets the following conditions:

A. More than 50% of the outstanding voting securities are directly or indirectly owned by residents of the U.S., and

B. Any of the following:

The business of the issuer is administered principally in the U.S.
More than 50% of the assets of the issuer are located in the U.S.
The majority of its executive officers or directors are U.S. citizens or residents.

Question 14

SEC Pronouncements

Answer 14

The main pronouncements published by the SEC are the Financial Reporting Releases (FRR) and the Staff Accounting Bulletins (SAB). ((NOTE - NOT Staff AUDITING Bulletins)

Question 15

The SEC has five commissioners appointed by the President of the U.S. and four divisions (collectively referred to as “the commission”).

Answer 15

The Division of Corporation Finance – This division oversees the compliance with the securities acts and examines all filings made by publicly held companies. All filings go to this division.
2.
The Division of Enforcement – When there is a violation of a securities law (except the Public Utility Holding Company Act), this division completes the investigation and takes appropriate actions. This division makes recommendations to the Justice Department concerning any punishments or potential criminal prosecution.
3.
The Division of Trading and Markets – This division oversees the secondary markets, exchanges, brokers, and dealers.
4.
The Division of Investment Management – This division oversees the investment advisers and investment companies under the Investment Company Act of 1940 and the Investment Advisers Act of 1940.

Question 16

SEC Securities Acts

Answer 16

1933 - Must register securities before issuing and provide voting proxy

1934 - regulate trading and provide reporting / disclosure requirements

S-X: form and content of financial statement reporting & financial disclosures

S-K: non-financial parts of reporting (MD&A of 10K)

Question 17

S-1 Requirements

Answer 17

A prospectus describes the issuing company, the business operations and risks, the financial statements, and the expected use of the proceeds. The basic financial statements requirements are:

a. Two years of balance sheets;
b. Three years of income statements, statements of cash flow and statements of shareholders’ equity;
c. The financial statements must be audited;
d. Prior statements are presented on a comparative basis;
e. The SEC requires five years of selected financial information.

2. Part 2 of Form S-1 includes information about the cost of issuing and distributing the security, more detailed information about the directors and officers and additional financial statement schedules.

Question 18

Filing Deadlines and Size

Answer 18

Based on non-affiliate worldwide common equity (voting & non-voting) for 10K/10Q (60/75/90 days) (40/40/45 days)

Large: 700+
Accelerated: 75 to 700
Non-Accelerated: <75

Question 19

The Sarbanes-Oxley Act of 2002 (SOX) contains provisions to enhance corporate governance and to mitigate financial accounting abuses. A few of the significant provisions related to financial reporting are presented below.

Answer 19

The SEC requires registrants to have annual audits of their financial statements. The auditing firm must be registered with the Public Company Accounting Oversight Board (PCAOB), a private-sector organization created by the 2002 Sarbanes-Oxley Act (the SEC has oversight authority for the PCAOB). The PCAOB provides oversight of registered auditing firms.

2. Auditors are prohibited from providing nonaudit services to audit clients.
3. Audit committees are required to be composed of nonmanagement members of the Board of Directors, and the chair has to have financial experience.
4. Annual filing must include a management’s report on the internal controls. This report must attest to the existence and effectiveness of the company’s internal controls over corporate reporting.
5. There are Increased penalties for fraud and white-collar crime. Willfully failing to maintain audit records for 5 years is a felony. Criminal charges can be brought against corporate officers who fail to certify financial reports or who willfully certify statements they know do not comply with SOX.

Question 20

10Q

Answer 20

The quarterly report is intended to provide investors with an update since the last annual report. The 10-Q is not required to be audited, but must be reviewed by the independent auditor.

2. The financial statements presented are:

a. Balance sheet for the quarter and prior fiscal year end;
b. Quarterly and year-to-date income statements for this quarter and the same period in the previous year;
c. Cumulative year-to-date statements of cash flow for the current and prior fiscal years.