STANDARD FORMATION
MODULE 1-1
Accounting Standard Formation
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ACCOUNTING STANDARDS
 Standard Setters





AICPA (CAP, APB), the “old”
SEC, the “true”
FASB, the “appointed”
GASB, the “other”
IASB, the “new”
GAAP – Generally Accepted
Accounting Principles
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PURPOSE OF THIS SECTION
Determine how accounting rules are made.
THE RULES
Rules for accounting are called Generally
Accepted Accounting Principles
(or “GAAP” for short).
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STANDARD SETTERS
Who Makes the Rules?
PAST:
Committee on Accounting Procedures (CAP) – issued Accounting
Research Bulletins (ARBs) from 1939 to 1959.
Accounting Principles Board (APB) – issued APB Opinions from 1959
to 1974.
These did
not work!
NOW:
Securities and Exchange Commission (SEC) – government agency
with legal power to create GAAP; delegates to FASB
Financial Accounting Standards Board – independent organization
with delegated responsibility to create GAAP
FUTURE:
International Accounting Standards Board - develop a single set of
global accounting standards
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STANDARD SETTERS
American Institute of Certified Public Accountants
National professional organization for CPAs.
The “old” standard setter
IN THE PAST: The AICPA created committees to form GAAP:
•
•
Committee on Accounting Procedures (CAP)
Accounting Principles Board (APB)
NOW: The AICPA funds the Accounting Standards Executive Committee (AcSec) which
issues:
Auditing and Accounting Guidelines – booklets summarizing auditing practices for
certain industries
Statements of Position (SOP) – guidelines for issues not yet addressed by the FASB
Practice Bulletins – guidelines for issues not likely to be addressed by the FASB
The AICPA also develops and grades the CPA exam.
Go to www.aicpa.org.
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STANDARD SETTERS
The Securities and Exchange Commission
Governmental agency that regulates:
• issuance of securities, and
• financial reporting of publicly-traded corporations
The SEC
• Requires US GAAP for companies traded on US Exchanges
• Delegates the formation of GAAP to FASB
• Intervenes in the formation of GAAP when deemed
necessary
• Has allowed international standards for publicly-traded, nonUS companies since 2010
The “official” standard setter
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WWW.SEC.GOV
(Quite Possibly the Best Web Site of All Time)
Go to: http://www.sec.gov
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STANDARD SETTERS
Financial Accounting Standards Board
The SEC has the legal right to regulate accounting
BUT, standard setting is delegated to the FASB.
The FASB is:
The “appointed” standard setter
• financed and maintained by the private sector since 1973
• comprised of seven remunerated members (5 year term)
• issues statements and interpretations that provide guidance
on accounting disclosure
Go to www.fasb.org
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STANDARD SETTERS
Governmental Accounting Standards Board
The Governmental Accounting Standards Board (GASB) sets
standards for municipal and state governments.
Federal standards are set by the U. S. Government
Accountability Office (GAO).
The “other” standard setters
Go to www.gasb.org.
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STANDARD SETTERS
International Accounting Standards Committee
The International Accounting Standards Board was formed in
1973 to develop a single set of global accounting standards.
Based in London, UK
• Comprised of 14 members with no geographical representation (6
auditors, 3 preparers, 3 users, 1 academician, 1 regulator)
• Appointed by 19 trustees (6 North America, 6 Europe, 4 Asia-Pacific, 3 any
area)
Objective: to improve and harmonize regulations, accounting standards,
and procedures relating to the presentation of financial statements.
The “new” standard setter
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International Financial Reporting Standards
(International GAAP)
• The IASB issues International Financial
Reporting Standards (IFRS) which:
• Tends to be principles based rather than rules
based.
• Favors fair value rather than historical cost.
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International Financial Reporting Standards
(International GAAP)
Current status of adoption:
• Over 120 countries, including the
European Union, Australia, and New
Zealand now require IFRS
• Canada, Japan, Korea, and India
adopted in 2011
• The SEC allows foreign companies
traded on US exchanges to use IFRS
• Current goal is for the US to adopt
by 2015
Accounting Standard Formation
I’m not
sure
what
we will
be
doing
yet.
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Market Capitalization in Millions USD May 2009
Exchange
New York Stock Exchange
NASDAQ
Total US
Euronext
London Stock Exchange
Frankfurt Stock Exchange (Deutsche Börse)
Madrid Stock Exchange (Bolsas y Mercados Españoles)
Swiss Exchange
Nordic Stock Exchange Group OMX
Milan Stock Exchange (Borsa Italiana)
Total Europe
Tokyo Stock Exchange
Shanghai Stock Exchange
Hong Kong Stock Exchange
Bombay Stock Exchange
National Stock Exchange of India
Korea Exchange
Shenzhen Stock Exchange
Total Asia
Toronto Stock Exchange
São Paulo Stock Exchange
Australian Securities Exchange
Johannesburg Securities Exchange
Total Other
Accounting Standard Formation
Market Value
9,574,066.60
2,773,684.30
12,347,750.90
2,262,751.60
2,204,320.00
1,132,126.20
1,084,606.40
854,369.00
664,465.80
554,613.90
8,757,252.90
3,102,492.90
2,069,937.10
1,773,002.20
1,032,589.60
968,815.10
640,357.60
563,103.30
10,150,297.80
1,347,674.00
920,263.90
839,062.70
605,040.20
3,712,040.80
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QUESTIONS TO THINK ABOUT
 Is it better to use
international or national
accounting rules?
 Which are stricter, US or
international accounting
rules?
 Which results in lower
income, US or international
rules?
 Which rules are harder to
understand US or
international?
Accounting Standard Formation
I wonder …
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International Financial Reporting Standards
(International GAAP)
What is convergence?
An attempt to make IFRS and US GAAP
similar (taking the best from both).
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ADVANTAGES AND DISADVANTAGES
OF ADOPTING IFRS
What are advantages of the US adopting IFRS?
•
•
•
Simplicity – 17,000 pages (U.S. GAAP) compared to 2,500 (IFRS)
Comparability – same accounting as foreign competitors
Markets – possibly greater access to international capital
What are disadvantages of the US adopting IFRS?



Loss of sovereignty over national commerce
Some believe IFRS rules are inferior
Cost of conversion
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International Financial Reporting Standards
Differences from US GAAP
How different is American GAAP from other GAAP?
Latest study is on differences between IFRS and US GAAP
Time Period: 2004 to 2006
Sample: 75 EU cross-listed firms
Findings:
 Differences between IFRS and US GAAP decreased from 2004 to
2006.
 In 2006, 28% of firms reported ROE 5% or higher under IFRS
compared to US GAAP
 In 2006, 10% reported ROE 5% lower under IFRS compared to US
GAAP
•
•
Source: Henry, Lin, and Yang Accounting Horizons 23(2) 2009 pp. 121-150
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THE SIDES
Mary Schapiro (Chairman of US Securities and Exchange
Commission)

does not feel bound by the previous administration

concerned about lack of consistency in application of IFRS

concerned about cost to switch to IFRS from U.S. GAAP

believes IASB may lack independence
Hans Hoogernorst (Chairman of the International Accounting
Standards Board)

Says SEC should start with the larger companies, early adoption

Clear dates for adoption needed so the US is not left out of global
markets and give up their leadership position

Continued convergence and relations with the FASB are at risk
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