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Chapter 1: Financial Accounting and Accounting Standards

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  1. Chapter 1: Financial Accountingand Accounting Standards Intermediate Accounting, 11th Edition Kieso, Weygandt, and Warfield Prepared by Jep Robertson and Renae Clark New Mexico State University Las Cruces, New Mexico

  2. Role of Financial Accounting To prepare statements that fairly reflect the financial health of the firm Why is there a demand for Financial Accounting To assist potential investors and creditors in valuing the firm To monitor the actions of management As a basis for determining management compensation Why is financial information important? Efficient economic resource allocation Chapter 1

  3. Need to Develop Standards Various users need financial information • Financial Statements • Balance Sheet • Income Statement • Statement of Stockholders’ Equity • Statement of Cash Flows • Note Disclosure The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Generally Accepted Accounting Principles (GAAP)

  4. Parties Involved in Standard Setting • Four organizations: • Securities and Exchange Commission (SEC) • American Institute of Certified Public Accountants (AICPA) • Financial Accounting Standards Board (FASB) • Government Accounting Standards Board (GASB)

  5. AICPA Let’s Get Some Terms Straight American Institute of Certified Public Accountants The national organization of practicing certified public accountants. • FASB Financial Accounting Standards Board The primary body which currently establishes and improves financial accounting and reporting standards for the guidance of issuers, auditors, users, and others. • APB Accounting Principles Board A committee of public accountants, industry accountants and academicians which issued 31 Opinions between 1959 and 1973. The APB replaced the CAP and was itself replaced by the FASB. Its opinions, unless superseded, remain a primary source of GAAP • CAP Committee on Accounting Procedure A committee of practicing CPAs which issued 51 Accounting Research Bulletins between 1939 and 1959 and is a predecessor of the FASB

  6. Let’s Get Some Terms Straight • GASB Government Accounting Standards Board • The primary body that currently establishes accounting and reporting standards for state and local governments • GAAP Generally accepted accounting principles A common set of standards, principles, and procedures which have substantial authoritative support and have been accepted as appropriate because of universal application • SEC Securities and Exchange Commission An independent regulatory agency of the United States government which administers the Securities Acts of 1933 and 1934 and other acts • IASB. International Accounting Standards Board International Accounting Standards Board. An international group, formed in 1973, that is actively developing and issuing accounting standards that will have international appeal and hopefully support

  7. Securities and Exchange Commission • Established by federal government • Accounting and reporting for public companies Securities Act of 1933 Securities Act of 1934 • Encouraged private standard-setting body • SEC requires public companies to adhere to GAAP • SEC Oversight • Enforcement Authority

  8. American Institute of CPAs • National professional organization • Established the following: Committee on Accounting Procedures Accounting Principles Board • 1939 to 1959 • Issued 51 Accounting Research Bulletins (ARBs) • Problem-by-problem approach failed • 1959 to 1973 • Issued 31 Accounting Principle Board Opinions (APBOs) • Wheat Committee recommendations adopted in 1973 http://www.aicpa.org/ LO 6

  9. Financial Accounting Standards Board Wheat Committee’s recommendations resulted in the creation of a the Financial Accounting Standards Board in 1973. Financial Accounting Foundation • Selects members of the FASB • Funds their activities • Exercises general oversight. Financial Accounting Standards Board • Mission to establish and improve standards of financial accounting and reporting. Financial Accounting Standards Advisory Council • Consult on major policy issues.

  10. Financial Accounting Standards Board Missions is to establish and improve standards of financial accounting and reporting. Differences between FASB and APB include: • Smaller Membership • Full-time, Remunerated Membership • Greater Autonomy • Increased Independence • Broader Representation http://www.fasb.org/

  11. In establishing financial standards, the FASB follows a due process procedure. The due process procedure gives time to interested persons to make their views known to the Board. FASBDue Process

  12. 4 1 2 3 AGENDA Discussion Memorandum Public Hearing Topics for standard setting are identified The FASB issues initial research and analysis A public hearing is conducted FASBDue Process

  13. 4 5 Exposure Draft Final Standard The FASB issues an exposure draft (tentative standard) The FASB evaluates responses and issues the final standard FASBDue Process

  14. Major Groups that Influence the Standard Setting Process

  15. House of GAAP