Chapter 3

The Environment of

Accounting Research

The accounting environment

Accounting standards are influenced by: Federal bodies Tax laws Specialized industries Inconsistencies in practice Disagreements among constituents Professional organizations International influences Litigation concerns Public concerns

The Securities and Exchange Commission (SEC)

Established by the Securities and Exchange Act of 1934

Ensure public companies fully and fairly disclose all material facts

SEC has statutory authority to issue rules and regulation

SEC’s Office of the Chief Accountant (OCA) establishes accounting policies followed by the SEC and is divided into three groups. Accounting Professional Practice International Affairs

The SEC - continued

Five SEC divisions consulted by the OCA groups: Corporate finance Trading and markets Enforcement Investment management Risk, Strategy, and Financial Innovation

The SEC - continued

SEC delegated accounting standard setting to the FASB, but has an oversight function

SEC rules and regulations Definitions Regulations – compilations of rules –

solicitation of proxies Procedural matters- proceedings

The Financial Accounting Standards Board (FASB)

Develop high quality financial reporting standards (GAAP)

Many entities involved: Financial Accounting Foundation (FAF) FASB – members from CPA firms, corporations,

academia, and industry. FASB staff- approximately 70 professionals with

various backgrounds. Emerging Issue Task Force (EITF) Financial Accounting Standards Advisory Council

(FASAC) – guides FASB on which projects to pursue and on task forces to be organized

The FASB - continued

Pronouncements: Statement of Financial Accounting

Standards (SFAS’s) A summary, a table of contents, introduction,

the standard, the list of members voting, basis for decision or dissention, appendices.

Interpretations of Financial Accounting Standards – interpret SFAS’s and AICPA Accounting Research Bulletins (ARB’s) and APB Opinions.

The FASB- continued

Technical Bulletins – provide timely guidance on implementation issues

Emerging Issues Task Force – established in 1984 – addresses issues not covered in pronouncements Usually involve industry specific issues

FASB Staff Positions (FSP) – application guidance – posted on the website and remain until incorporated into Staff Implementation Guides

FASB Due Process 1. identify problem while considering legal pressures 2. consider interested party input to determine if issue is

worthy of consideration 3. establish a task force 4. have research staff investigate issue 5. issue discussion memo 6. hold public hearings 7. analyze results of investigation, communicate

responses and conduct additional public hearings 8. if appropriate, issue an exposure draft 9. request additional comments and hold additional

public hearings. 10. issue final SFAS after analyzing comments.

Conceptual Framework

Statements of Financial Accounting Concepts (SFAC’s) – describe concepts and relationships that underlie financial accounting standards Elements of financial statements –

measurement, recognition, display Capital maintenance Unit of measure Criteria for measurement Qualitative characteristics

Concept Statements Have not gone through due process SFAC1 – Objectives of financial reporting (Chpt 1 of

SFAC 8 – Conceptual Framework for Financial Reporting)

SFAC 2 – qualitative characteristics (Chpt 3 of SFAC 8) SFAC 3 – replaced by 6 SFAC 4 – objectives of financial reporting of nonbusiness

organizations SFAC 5 – recognition and measurement in financial

statements SFAC 6 – elements of financial statements SFAC 7 – using cash flow information and present value

in accounting measurement

American Institute of Certified Public Accountants (AICPA)

Was the standard setting body before the FASB AICPA’s Committee on Accounting Procedures issued ARB’s

(Accounting Research Bulletins) from 1939 to 1959 – some still apply

The Accounting Principles Board (APB) issued APB’s from 1959 until 1973.

The Accounting Standards Division previously through the Accounting Standards Executive Committee (AcSEC), now known as the Financial Reporting Executive Committee (FinREC) influences standard setting through comment letters and Issue papers

Statement of Positions were previously issued by AICPA, but currently are issued by the FASB.

Other publications – Accounting Research Monographs, US GAAP Financial Statements Best Practices and Disclosure

The Governmental Accounting Standards Board (GASB)

Sets financial and reporting standards for the public sector

Established in 1984 by the Financial Accounting Foundation (FAF), seven members

Created the Government Finance Officers Association (GFOA) and the National Association of State Auditors, Comptrollers, and Treasurers

The GASB - continued

Due process similar to the FASB Advisory council is the Governmental

Accounting Standards Advisory Council (GASAC)

Publications – GASB Codification of Government Accounting & Financial Reporting Studies, the US Comptroller General’s “Yellow Book” (codification of audit standards for government organizations), US Congress’s “Single Audit Actof 1984”

Other organizations influencing accounting standard setting

Cost Accounting Standards Board (CASB) Income tax laws Securities Industry Associates (SIA)- represents

investment bankers and financial analysts National Association of State Auditors, Controllers, and

Treasurers Financial Executives Institute (FEI) – active committees,

research, conferences Institute of Management Accountants (IMA) –

committees, foundation, research American Accounting Association (AAA) – theoretical

research, publications Institute of Internal Auditors (IIA)- research, committees

Generally accepted accounting principles (GAAP)

The conventions, rules, and procedures necessary to define accounting practice at a particular time.

Two functions Measurement Disclosure

Financial statements must be in conformity with GAAP in order for CPA’s to express an opinion on them

Pre-Codification Hierarchy of GAAP

Level A FASB statements, APBs, ARBs, SEC Rules (10K, 8K)

Level B AICPA Industry guides, SOPs, FASB technical bulletins

Level C AcSEC practice bulletins, EITFs, SEC speeches

Level D AICPA interpretations, FASB implementation guides,

industry practices, uncleared SOPs Level E

APB statements, AICPA issue papers, FASB concepts statements, IASB statements, journal articles, textbooks

Post-Codification GAAP

Two levels (Figure 3-5) Authoritative

Most prior levels A-D, some level E Non-authoritative

Most level E and some level D

If a non-governmental source is not found in the Codification, it is not GAAP

Accounting Authoritative Support- Figure 3-7

Primary Support General Application and Special Application

(FASB standards, AICPA SOPs) Secondary Support

Official publications of bodies and other sources (SEC staff bulletins, FASB technical bulletins)

Reading a pronouncement

Introduction Background Board’s conclusion Opinion or statement Effective date Illustrations Required disclosures