Chapter 1: Financial Accounting and Accounting Standards

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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
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Chapter 1

• 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

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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)
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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)

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Lets Get Some Terms Straight

• AICPA

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opinions, unless superseded, remain a primary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
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Lets 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
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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

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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/
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Financial Accounting Standards Board
Wheat Committees 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.

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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/
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FASBDue Process

• 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.

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FASBDue Process
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FASBDue Process
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Major Groups that Influence the Standard Setting
Process
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House of GAAP