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STANDARD FORMATION. MODULE 1-2. ACCOUNTING STANDARDS. Objectives of Financial Reporting Standard Setters AICPA (CAP, APB), the “old” SEC, the “true” FASB, the “appointed” GASB, the “other” IASB, the “new”. GAAP – Generally Accepted Accounting Principles. PURPOSE OF THIS SECTION.

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standard formation

STANDARD FORMATION

MODULE 1-2

Accounting Standard Formation

accounting standards
ACCOUNTING STANDARDS
  • Objectives of Financial Reporting
  • Standard Setters
  • AICPA (CAP, APB), the “old”
  • SEC, the “true”
  • FASB, the “appointed”
  • GASB, the “other”
  • IASB, the “new”

GAAP – Generally Accepted Accounting Principles

Accounting Standard Formation

purpose of this section
PURPOSE OF THIS SECTION

Determine how accounting rules are made.

THE RULES

Rules for accounting are called Generally Accepted Accounting Principles

(or “GAAP” for short).

Accounting Standard Formation

objectives of financial reporting concept statement 1
OBJECTIVES OF FINANCIAL REPORTING( Concept Statement 1)
  • Making rational investment and credit decisions
  • Assess amounts, timing, and uncertainty of future cash flows
  • Portray economic resources and claims to resources.

Accounting Standard Formation

standard setters who makes the rules
STANDARD SETTERSWho Makes the Rules?

PAST:

Committee on Accounting Procedures (CAP) – issued Accounting Research Bulletins (ARBs) from 1939 to 1959.

Accounting Principles Board (APB) – issued APB Opinions from 1959 to 1974.

NOW:

Securities and Exchange Commission (SEC) – government agency with legal power to create GAAP; delegates to FASB

Financial Accounting Standards Board – independent organization with delegated responsibility to create GAAP

FUTURE:

International Accounting Standards Board - develop a single set of global accounting standards

These did not work!

Accounting Standard Formation

standard setters american institute of certified public accountants
STANDARD SETTERSAmerican Institute of Certified Public Accountants

The “old” standard setter

National professional organization for CPAs.

IN THE PAST: The AICPA created committees to form GAAP:

  • Committee on Accounting Procedures (CAP)
  • Accounting Principles Board (APB)

NOW: The AICPA funds the Accounting Standards Executive Committee (AcSec) which issues:

Auditing and AccountingGuidelines– booklets summarizing auditing practices for certain industries

Statements of Position (SOP)– guidelines for issues not yet addressed by the FASB

Practice Bulletins– guidelines for issues not likely to be addressed by the FASB

The AICPA also develops and grades the CPA exam.

Go to www.aicpa.org.

Accounting Standard Formation

standard setters the securities and exchange commission
STANDARD SETTERSThe Securities and Exchange Commission
  • Governmental agency that regulates:
  • issuance of securities, and
  • financial reporting of publicly-traded corporations
  • The SEC
  • Requires US GAAP for companies traded on US Exchanges
  • Delegates the formation of GAAP to FASB
  • Intervenes in the formation of GAAP when deemed necessary
  • Has allowed international standards for publicly-traded, non-US companies since 2010

The “official” standard setter

Accounting Standard Formation

www sec gov quite possibly the best web site of all time
WWW.SEC.GOV(Quite Possibly the Best Web Site of All Time)

Accounting Standard Formation

Go to: http://www.sec.gov

standard setters financial accounting standards board
STANDARD SETTERSFinancial Accounting Standards Board

The SEC has the legal right to regulate accounting

BUT, standard setting is delegated to the FASB.

The FASB is:

  • financed and maintained by the private sector since 1973
  • comprised of seven remunerated members (5 year term)
  • issues statements and interpretations that provide guidance on accounting disclosure

Go to www.fasb.org

The “appointed” standard setter

Accounting Standard Formation

standard setters governmental accounting standards board
STANDARD SETTERSGovernmental Accounting Standards Board

The Governmental Accounting Standards Board (GASB) sets standards for municipal and state governments.

Federal standards are set by the U. S. Government Accountability Office (GAO).

The “other” standard setters

Accounting Standard Formation

Go to www.gasb.org.

standard setters international accounting standards committee
STANDARD SETTERSInternational Accounting Standards Committee
  • The International Accounting Standards Board was formed in 1973 to develop a single set of global accounting standards.
  • Based in London, UK
  • Comprised of14 members with no geographical representation (6 auditors, 3 preparers, 3 users, 1 academician, 1 regulator)
  • Appointed by19 trustees (6 North America, 6 Europe, 4 Asia-Pacific, 3 any area)
  • Objective: to improve and harmonize regulations, accounting standards, and procedures relating to the presentation of financial statements.

The “new” standard setter

Accounting Standard Formation

international financial reporting standards international gaap
International Financial Reporting Standards(International GAAP)
  • The IASB issues International Financial Reporting Standards (IFRS) which:
  • Tends to be principlesbased rather than rulesbased.
  • Favors fair valuerather than historical cost.

Accounting Standard Formation

international financial reporting standards international gaap1
International Financial Reporting Standards(International GAAP)

Current status of adoption:

  • Over 120 countries, including the European Union, Australia, and New Zealand nowrequire IFRS
  • Canada, Japan, Korea, and India adopted in 2011
  • The SEC allows foreign companies traded on US exchanges to use IFRS
  • Current goal is for the US to adopt by 2015

I’m not sure what we will be doing yet.

Accounting Standard Formation

questions to think about

I wonder …

QUESTIONS TO THINK ABOUT
  • Is it better to use international or national accounting rules?
  • Which are stricter, US or international accounting rules?
  • Which results in lower income, US or international rules?  
  • Which rules are harder to understand US or international?

Accounting Standard Formation

international financial reporting standards international gaap2
International Financial Reporting Standards(International GAAP)

What is convergence?

An attempt to make IFRS and US GAAP similar (taking the best from both).

Accounting Standard Formation

advantages and disadvantages of adopting ifrs
ADVANTAGES AND DISADVANTAGES OF ADOPTING IFRS

What are advantages of the US adopting IFRS?

  • Simplicity – 17,000 pages (U.S. GAAP) compared to 2,500 (IFRS)
  • Comparability – same accounting as foreign competitors
  • Markets – possibly greater access to international capital

What are disadvantages of the US adopting IFRS?

  • Loss of sovereignty over national commerce
  • Some believe IFRS rules are inferior
  • Cost of conversion

Accounting Standard Formation

international financial reporting standards differences from us gaap
International Financial Reporting StandardsDifferences from US GAAP

How different is American GAAP from other GAAP?

Latest study is on differences between IFRS and US GAAP

Time Period: 2004 to 2006

Sample: 75 EU cross-listed firms

Findings:

  • Differences between IFRS and US GAAP decreased from 2004 to 2006.
  • In 2006, 28% of firms reported ROE 5% or higher under IFRS compared to US GAAP
  • In 2006, 10% reported ROE 5% lower under IFRS compared to US GAAP

Source: Henry, Lin, and Yang Accounting Horizons 23(2) 2009 pp. 121-150

Accounting Standard Formation

the sides
THE SIDES

Mary Schapiro (Chairman of US Securities and Exchange Commission)

  • does not feel bound by the previous administration
  • concerned about lack of consistency in application of IFRS 
  • concerned about cost to switch to IFRS from U.S. GAAP
  • believes IASB may lack independence

David Tweedie (Chairman of the International Accounting Standards Board)

  • says IASB gets criticism over the “favored-nation” status toward US
  • notes that other countries are running out of patience waiting for SEC approval of transition roadmap  
  • notes contradiction of US having heavy representation on IASB, but does not accept it

Accounting Standard Formation