1.1 Financial accounting standard
US GAAP
Security and Exchange Commission
(SEC) - 1934
Has legal authority to establish U.S GAAP
Has allowed the accounting profession to establish GAAP and self regulate.
Issued public company specific accounting rules and regulation
Regulation S-X
Financial Reporting Releases
(FRR)
Accounting Series Release (ASR)
Interpretative Release
Staff Accounting Bulletins (SAB)
EITF Topic D
SEC Observer comments
Committee on Accounting Procedure
(CAP) 1939-1959
Part time committee of AICPA that promulgated Accounting Research Bulletins which determine GAAP
Accounting Principles Board
(APR) 1959-1973
Part time committee of the AICPA
Accounting Principle Board Opinions
(APBO)
APB Interpretation
Financial Accounting Standards Board
(FASB) 1973-now
An independent full-time organization
In 2009 , FASB issues
Statements of Financial Accounting Standards (SFAS)
FASB Interpretations (FIN)
FASB Technical Bulletins (FTB)
Emerging issues Task Force Statement (EIFT)
FASB Staff Positions
FASB Implementation Guides
Statements of Financial Accounting Concepts (SFAC)
The FASB has seven full-time members who serve for five year terms and maybe re-appointed to one additional five-year term. The Board members must sever connection with firms or institutions before joining the board.
1.2 US GAAP: FASB Accounting Standards Codification
The vast number of standards issued by the Committee on Accounting Procedures, the Accounting Principles Board, and the Financial Accounting Accounting Standards Board, as well as additional guidance provided by the SEC and the AICPA, made it difficult for users to access the full body of U.S GAAP
Private Company Council
Effective July 1, 2009, the FASB Accounting Standards Codification became the single source of authoritative nongovernmental U.S GAAP. Accounting and financial reporting practices not included in the codification are not GAAP.
Private Company Council (PCC)
The Financial Accounting Foundation (FAF) created the Private Company Council (PCC) to improve standards setting for privately held companies in the US . The goal of the PCC is to establish alternatives to US GAAP where appropriate to make private company financial statements more relevant less complex and cost-beneficial . Accounting alternatives for privates companies are incorporated into the relevant sections of the Accounting Standards Codification (ASC).
Ongoing Standard-Setting Process
The FASB updates the Accounting Standards Codification for new US GAAP issued by the FASB and for amendments to the SEC content with Accounting Standard Updates.
Proposed FASB amendments to the ASC are issued for public comment in the form of exposure drafts. A majority vote of the Board members is required to approve an exposure draft for an issuance. At the end of the exposure draft public comment period, the FASB staff analyzes and studies all comment letters and position papers and then the board re-deliberates the issue.
When the board is satisfied that all reasonable alternatives have been adequately considered the FASB staff prepares an Accounting Standards Update for Board consideration. A majority vote of the Board members is required to amend the ASC.
Accounting Standards Updates are not authoritative literature, but instead provide background information update the codification and describe the basis for conclusions on changes in the codification. All new GAAP and SEC amendments are fully integrated into the existing striation of the codification.
International Financial Reporting Standards
(IFRS)
The International Accounting Standards Board (IASB) was established in 2001 as part of the International Financial Reporting Standards (IFRS) Foundation.
When the IASB was created, it adopted the International Accounting Standards (IAS) that had been issued by its predecessor, the Board of the International Accounting Standards Committee.
The IASB issues International Financial Reporting Standards (IFRS) and related documents including the Conceptual Framework for Financial Reporting, exposure drafts, and other discussion documents. The term International Financial Reporting Standards includes IFRSs, IASs, and interpretations developed by the IFRS Interpretation Committee (IFRC0 and the former Standards Interpretations Committee (SIC)
1.3 Conceptual Framework for Financial Reporting SFAC (4,5,6,7,8)
The FASB has created a conceptual framework (set forth in pronouncements called Statements of Financial Accounting Concepts, or SFAC) that serves as a basic for all FASB pronouncements.
The SFAC are not GAAP but they provide a basis for financial accounting concepts for business and nonbusiness enterprises.
As phases of this project are completed, the FASB will issue each component of the conceptual framework as a chapter in Statement of Financial Accounting Concept No.8 , Conceptual Framework for Financial Reporting. The chapters of SFAC No.8 that have been issued replaced SFAC No.1 "Objectives of Financial Reporting by Business Enterprises" and SFAC No.2 "Qualitative Characteristics of Accounting Information"
SFAC No.8 with chapters replaced SFAC No.1 & 2
Chapter 1: "The Objective of General Purpose Financial Reporting"
Chapter 3 : "Qualitative Characteristics of Useful Financial Information"
The qualitative characteristics of useful financial information are the characteristics that are likely to be most useful to existing and potential investors, lenders and other creditors in making decisions about the reporting entity based on financial information.
The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to the primary users of general purpose financial reports in making decisions about providing resources to the reporting entity.
Fundamental Qualitative Characteristics.
Relevance
Faithful Representation
Financial information is relevant if it is capable of making a difference in the decisions made by users.
Predictive Value
Confirmatory Value
Materiality
To be useful, financial information must faithfully represent the reported economic phenomena.
Although perfect faithful representation is generally not achievable, these cha
Complete
Free From Error
if it can bemused by users to predict future outcomes
if an omission or misstatement of the information could affect the decision made by users based on financial information.
if it provides feedback about evaluations previously made by users.
Primary Users: Existing and potential investors, lenders and other creditors.
Includes all information necessary for the user to understand the reported economic event including descriptions and explanation
include all information necessary for the user to understand the reported economic event, including description and explanations.
Neutral
free from bias in selection or presentation
there are no errors in the selection or application of the process used to produce reported financial information and that there are no errors or omissions in the descriptions of economic events.
Steps to Apply the Fundamental Qualitative Characteristics.
- Identify the economic event or transaction that has the potential to be useful for the users of a reporting entity's financial information.
- Identify the type of information about the event or transaction that would be most relevant.
- Determine whether the information is available and can be faithfully represented.
Enhancing Qualitative Characteristics
Comparability
Verifiability
Timeliness
Understandability
information is more useful if it can be compared with similar information about other entities or from other time periods.
Comparability enables users to identify similarities and differences among items.
Consistency which is the use of the same methods for the same items either from period to period within an entity or in a single period across entities, help to achieve comparability.
mean that different knowledgable and independent observers can reach consensus that a particular depiction is faithful represented.
means that information is available to users in time to be capable of influencing their decision.
information is understandable if it is classified, characterized, and presented clearly and concisely.
SFAC No.3 replaced by SFAC No.6
SFAC No.4
Objectives of Financial Reporting by Nonbusiness Organization
The characteristics of Nonbusiness Organizations
- A significant portion of their resource from contributions and grants .
- Their operating purposes are other than to provide goods or services for profit.
- They lack ownership interests that can be sold, transferred, or redeemed, or that allow a claim on resources upon liquidation.
Users of Financial Information of Nonbusiness Organization
Resources Providers: including lenders, suppliers, employees, members, contributors and taxpayersq
Constituents: who use and benefit from the services provided by nonbusiness organization.
Governing and oversight bodies:that are responsible for setting policies and for overseeing and evaluating the managers of nonbusiness organization.
Managers: who are responsible for carrying out the policy mandates of the governing bodies and managing the day-to-day operations of the nonbusiness organization.
Objectives of Financial Reporting of Nonbusiness Organization.
Information useful in making resources allocation decisions
Information useful in assessing services and the ability to provide services.
Information useful in assessing management stewardship and performance.
Information about economic resources, obligations, and net resources, organization performance, the nature of and relationship between inflow and outflows, service effort and accomplishments and liquidity.
SFAC No.5 Recognition and Measurement in the Financial Statements.
This statement set forth the recognition criteria and guidance on what and when information should be incorporated in the financial statements.
Full set of Financial Statement
Statement of financial position (BS)
(Financial Risk)
Statement of Earning (IS)
(Performance, Operating Risk)
Statement of comprehensive income
Statement of cash flows
Statement of changes in owner's equity
Fundamental Recognition Criteria
Recognition is the process of formally recording or incorporating an item in the financial statements of an entity and classifying it as asset, liability, equity, revenue or expenses.
Definition: the item meets the definition of an element of financial statement.
Measurability : the item has relevant attribute measurable
Relevance: the information about it is capable of making a difference to a financial statement user.
Reliability: the information is representationally faithful, verifiable and neutral
Measurement Attributes for Assets and Liabilities
Items reported in the financial statements are currently measured using different attributes
PP& E: Historical Value
Inventory: Current Cost
Account Receivable: Net Realizable Value
Market Security/TS/AFS : Current Market Value
Bonds, Notes:Present value of future cash flow
Fundamental Assumption and Principles
Entity Assumption: Economic activity can be accounted for when considering an identifiable set of activities.
Going Concern Assumption: For financial accounting, it is presumed that the entity will continue to operate in the foreseeable future.
Monetary Unit Assumption: it is assumed that money is an appropriate basis by which to measure economic activity.
Periodic Assumption: economic can be divided into meaningful time period: quarter/year
Measurement Principle: Financial statements use a mixed attribute system that allows assets and liabilities to be measured at various bases.
Accrual accounting: revenue are recognized when the performance obligation is satisfied and expenses are recognized in the same period as the related revenue, not necessarily in the period in which the cash is received or expensed by the company.