Standard Setting Process

Question 1

Background

Answer 1

IASC (international accounting standards committee) and FASB (financial accounting standards board).

Each board has their own conceptual framework.

SEC in an independent federal regulatory agency to prescribe the form and content of financial statements for public companies.

Question 2

Issue:

Answer 2

managers, shareholders, auditors, and standard setters all derive benefits from selective financial misrepresentation.

Question 3

Manager Benefits

Answer 3

management compensation is based on reported earnings. Managers will have an initiative to increase reported profits for increased compensation. This can lead to income shifting.

Question 4

Shareholder Benefits

Answer 4

gain benefits from loose reporting methods

Question 5

Loose Reporting Methods

Answer 5

historical cost: management can belatedly report gains to offset current period operating shortfalls

LIFO: dipping into LIFO layers and timing of purchases at year end can help achieve desired income targets of management.

Question 6

Auditor Benefits

Answer 6

prefer reporting rules that sometimes distort economic reality

rigid standards reduces the possibilities for friction with clients where future outcomes are uncertain

opt for reporting standards that encompass both rigid and computational metrics and flexibility: reporting dilemma driven more by theory debates rather than uncertain future events.