Standard Setting Process Flashcards
Background
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.
Issue:
managers, shareholders, auditors, and standard setters all derive benefits from selective financial misrepresentation.
Manager Benefits
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.
Shareholder Benefits
gain benefits from loose reporting methods
Loose Reporting Methods
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.
Auditor Benefits
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.