FASB and Standard Setting Process

Question 1

What is the purpose of Financial Accounting and Reporting?

Answer 1

To provide relevant information to investors and creditors for the purpose of making informed resource allocation decisions (to invest in a firm, etc.)

Question 2

What are financial statements?

Answer 2

Culmination of the accounting process and represent the most comprehensive financial information disclosures made by firms. The footnotes and other textuals and tabular information provide supplementary information and help to explain the amounts disclosed in those statements.

Question 3

What is GAAP?

Answer 3

Generally Accepted Accounting Principles. The rules of financial reporting for business standards. Also called accounting standards.

Question 4

What 3 aspects of financial reporting does GAAP address?

Answer 4

1. ) Recognition - an item is recorded in an account and ultimately affects the financials
2. ) Measurement - Concerns the dollar amount of an item
3. ) Disclosure - Many unrecognized items are recorded in the footnotes and must be disclosed to complete the portrayal of the firm’s financial position.

Question 5

What Organizations are involved in Developing Accounting Standards?

Answer 5

1. ) The FASB
2. ) The SEC
3. ) The AICPA
4. ) The Private Company Council

Question 6

What is the Financial Accounting Standards Board (FASB)?

Answer 6

It is currently the standard-setting body in the United States. It is a private sector body.

Question 7

What is the mission of the FASB?

Answer 7

1. ) Improve the usefulness of financial reporting
2. ) Maintain current accounting standards
3. ) Promptly address deficiencies in accounting standards
4. ) Promote international convergence of accounting standards
5. ) Improve the common understanding of the nature and purposes of information in financial reports

Question 8

How many members does the FASB have?

Answer 8

7 full-time members with renewable and staggered 5 year terms

Question 9

What are the 3 parts of the current accounting standard-setting mechanism in the U.S.?

Answer 9

1. ) The FASB - subject only to FAF
2. ) Financial Accounting Foundation (FAF)
3. ) Financial Accounting Standards Advisory Council (FASAC) - Provides guidance on major policy issues, project priorities and the formation of task forces.

Question 10

What is the FAF (Financial Accounting Foundation)?

Answer 10

Appoints members of the FASB and its advisory councils, ensures adequate funding for the FASB, and exercises oversigh over the FASB. Funding sources include fees levied on publicly traded firms under SOX, contributions and publication sales.

Question 11

What is the SEC (Securities and Exchange commission)?

Answer 11

Federal government agency that administers the securities laws of the U.S. These laws affect firms that issue debt and equity to the public. SUch firms register with the SEC and are called “registrants.” The financial statements of these firms must be filed with the SEC and must be audited by independent third parties (CPA firms).

Question 12

What authority does the SEC have?

Answer 12

Congress granted the SEC power to establish GAAP for the firms it governs. It has generally ceded this authority to a private sector body (FASB). The FASB considers the potential reaction of the SEC in its proposed standards.

Question 13

What is the AICPA (American Institute of Certified Public Accountants).

Answer 13

National professional organization for practicing CPAs. The mission of the AICPA is to provide its members with resources, information and leadership so that they can perform valuable services for their clients. All past standard setting bodies were created by the AICPA.

Question 14

What principles does the FASB apply when promulgating GAAP?

Answer 14

1. ) Accounting standards must be unbiased and not favor any particular industry, standards are for the benefit of financial statement users.
2. ) The needs and views of the economic community should be considers, the views of the accounting profession should not take precendence
3. ) The process should be open to the public and allow due process to provide opportunity for interested parties to make their views known.
4. ) The benefits of accounting standards should exceed their cost.

Question 15

What process does the FASB use when issuing an accounting standard?

Answer 15

1. ) Considers whether to add the project to their agenda.
2. ) Conducts research on the topic and issues a discussion memo.
3. ) Holds public hearings on the topic
4. ) Evaluates research and comments from interest parties and issues an exposure raft
5. ) Solicits additional comments, modifies the exposure draft as needed.
6. ) Finalize the new accounting guidance and approves with a majority vote (4 of 7 affirmative votes).
7. ) Issues an Accounting Standards Update (ASU).

Question 16

Which standard setting bodies have enforcement authority?

Answer 16

The SEC has the authority to penalize firms and managers when financial statements do not comply. FASB has no enforcement authority. Rather, there are economic sanctions for firms not complying with GAAP (i.e. not being able to raise debt and equity capital).

Question 17

What is the purpose of Financial Accounting?

Answer 17

To provide information to Investors and Creditors

Question 18

What is the primary protection for investors against fraudulent financing reporting by corporations?

Answer 18

The requirement that financial statements be audtired

Question 19

What does “Negative economic consequences” mean in reference to a proposed accounting standard?

Answer 19

Inability to raise capital