FASB - Role/Std. Setting Process

Question 1

FASB

Answer 1

establishes financial accounting standards for business entities. The FASB is an independent body, subject only to the FAF. –SETS GAAP–

Seven full-time members with renewable (for one additional term) and staggered 5-year terms.

Subject to FAF policies and oversight.

Members cannot have employment or investment ties with other entities.

Members need not be CPAs although typically the public accounting profession is represented; also the preparer (reporting firm) and investor communities are represented.

Question 2

FAF - Financial Accounting Foundation (parent body)

Answer 2

appoints the members of the FASB and its advisory councils

ensures adequate funding for the FASB

exercises oversight over the FASB

Funding sources include fees levied on publicly traded firms under the Sarbanes-Oxley Act, contributions, and publication sales. The trustees of the FAF are appointed from organizations with an interest in accounting standards.

Question 3

FASAC - Financial Accounting Standards Advisory Council

Answer 3

provides guidance on major policy issues, project priorities, and the formation of task forces.

Question 4

Process when Issuing a Standard

Answer 4

1. Considers whether to add a project to its agenda
2. Conducts research on the topic and issues a Discussion Memorandum detailing the issues surrounding the topic
3. Holds public hearings on the topic
4. Evaluates the research and comments from interested parties and issues an Exposure Draft - the initial accounting standard
5. Solicits additional comments, modifies the Exposure Draft if needed
6. Finalizes the new accounting guidance and approves with a majority vote
7. Issues an Accounting Standards Update (ASU)

Question 5

EITF - Emerging Issues Task Force

Answer 5

consider emerging reporting issues and to accelerate the process of establishing rulings on such issues

*acts as a “filter” for the FASB, enabling the FASB to focus on more pervasive issues. When a consensus of the 15 members is reached on an issue, no further action by the FASB is required

Question 6

negative “economic consequences”

Answer 6

refers to the effect of a proposed standard on a firm’s financial statements. A common argument against a proposed standard is that it will cause earnings to decline, thus reducing the firm’s ability to raise capital.

Question 7

Authority of Enforcing GAAP

Answer 7

The SEC has the authority to penalize firms and managers subject to its jurisdiction when financial statements do not comply with GAAP. Public companies are violating the securities laws if they publish financial statements that materially depart from GAAP.

Question 8

GAAP

Answer 8

Set of reporting rules to address 3 aspects of financial reporting:

1. Recognition
2. Measurement
3. Disclosure

**NOT “laws” but the SEC can penalize firms w/in jurisdiction that violate securities law by publishing f/s that materially depart from GAAP

Question 9

Codification

Answer 9

compilation and reorganization of all GAAP sources

ASC -Accounting Standards Codification - is the official name

ASU - Accounting Standards Updates - how updates to GAAP are communicated - these are not GAAP

Question 10

Codification Structure

Answer 10

Areas
Topics (receivables [310])
Subtopics (Non-refundable [20])
Sections (Initial Measurement [30])
Subsections (Syndication Fees [4])

310-20-30-4

4 AREAS:

• General
• Balance Sheet
• Income Statement
• Other

Question 11

USEFUL INFO - primary characteristics

Answer 11

1. FAITHFUL REP - complete, neutral, free of error
2. RELEVANCE - predictive, confirmatory, materiality

Roger is PC, although a little materialistic
He is Never on the F.E.N.C.

Question 12

USEFUL INFO - qualitative characteristics

Answer 12

1. Comparability
2. Verifiability
3. Timeliness
4. Understand-ability

CUT like a V!

Question 13

Assumptions - E-GUT

Answer 13

1. Entity - separate and distinct from owners
2. Going-Concern - owner dies, entity still alive
3. Unit of measurement - values stable, not adj for inflation
4. Time-Period - i.e. years, quarters, months

Question 14

Accounting Principles - FE.R.M

Answer 14

1. Revenue Recognition
2. Expense Recognition (matching)
3. Measurement
4. Full Disclosure

Revenue is recognized when realized and earned