Chapter 3
The Environment of
Accounting Research
The accounting environment
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Accounting standards are influenced by:
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Federal bodies
Tax laws
Specialized industries
Inconsistencies in practice
Disagreements among constituents
Professional organizations
International influences
Litigation concerns
Public concerns
The Securities and Exchange
Commission (SEC)
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Established by the Securities and Exchange Act of 1934
Ensure public companies fully and fairly disclose all
material facts
SEC has statutory authority to issue rules and regulation
SEC’s Office of the Chief Accountant (OCA) establishes
accounting policies followed by the SEC and is divided
into three groups.
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Accounting
Professional Practice
International Affairs
The SEC - continued
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Five SEC divisions consulted by the OCA
groups:
Corporate finance
 Trading and markets
 Enforcement
 Investment management
 Risk, Strategy, and Financial Innovation
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The SEC - continued
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SEC delegated accounting standard setting to the
FASB, but has an oversight function
SEC rules and regulations
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Definitions
Regulations – compilations of rules – solicitation of proxies
Procedural matters- proceedings
The Financial Accounting Standards
Board (FASB)
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Develop high quality financial reporting standards
(GAAP)
Many entities involved:
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Financial Accounting Foundation (FAF)
FASB – members from CPA firms, corporations, academia,
and industry.
FASB staff- approximately 70 professionals with various
backgrounds.
Emerging Issue Task Force (EITF)
Financial Accounting Standards Advisory Council (FASAC) –
guides FASB on which projects to pursue and on task forces
to be organized
The FASB - continued
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Pronouncements:
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Statement of Financial Accounting Standards
(SFAS’s)
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A summary, a table of contents, introduction, the
standard, the list of members voting, basis for decision or
dissention, appendices.
Interpretations of Financial Accounting
Standards – interpret SFAS’s and AICPA
Accounting Research Bulletins (ARB’s) and
APB Opinions.
The FASB- continued
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Technical Bulletins – provide timely guidance on
implementation issues
Emerging Issues Task Force – established in 1984 –
addresses issues not covered in pronouncements
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Usually involve industry specific issues
FASB Staff Positions (FSP) – application guidance
– posted on the website and remain until
incorporated into Staff Implementation Guides
FASB Due Process
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1. identify problem while considering legal pressures
2. consider interested party input to determine if issue is worthy of
consideration
3. establish a task force
4. have research staff investigate issue
5. issue discussion memo
6. hold public hearings
7. analyze results of investigation, communicate responses and conduct
additional public hearings
8. if appropriate, issue an exposure draft
9. request additional comments and hold additional public hearings.
10. issue final SFAS after analyzing comments.
Conceptual Framework
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Statements of Financial Accounting Concepts
(SFAC’s) – describe concepts and relationships
that underlie financial accounting standards
Elements of financial statements – measurement,
recognition, display
 Capital maintenance
 Unit of measure
 Criteria for measurement
 Qualitative characteristics
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Concept Statements
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Have not gone through due process
SFAC1 – Objectives of financial reporting (Chpt 1 of SFAC 8
– Conceptual Framework for Financial Reporting)
SFAC 2 – qualitative characteristics (Chpt 3 of SFAC 8)
SFAC 3 – replaced by 6
SFAC 4 – objectives of financial reporting of nonbusiness
organizations
SFAC 5 – recognition and measurement in financial
statements
SFAC 6 – elements of financial statements
SFAC 7 – using cash flow information and present value in
accounting measurement
American Institute of Certified
Public Accountants (AICPA)
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Was the standard setting body before the FASB
AICPA’s Committee on Accounting Procedures issued ARB’s
(Accounting Research Bulletins) from 1939 to 1959 – some still apply
The Accounting Principles Board (APB) issued APB’s from 1959 until
1973.
The Accounting Standards Division previously through the
Accounting Standards Executive Committee (AcSEC), now known as
the Financial Reporting Executive Committee (FinREC) influences
standard setting through comment letters and Issue papers
Statement of Positions were previously issued by AICPA, but currently
are issued by the FASB.
Other publications – Accounting Research Monographs, US GAAP
Financial Statements Best Practices and Disclosure
The Governmental Accounting
Standards Board (GASB)
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Sets financial and reporting standards for the
public sector
Established in 1984 by the Financial Accounting
Foundation (FAF), seven members
Created the Government Finance Officers
Association (GFOA) and the National
Association of State Auditors, Comptrollers, and
Treasurers
The GASB - continued
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Due process similar to the FASB
Advisory council is the Governmental Accounting
Standards Advisory Council (GASAC)
Publications – GASB Codification of Government
Accounting & Financial Reporting Studies, the US
Comptroller General’s “Yellow Book”
(codification of audit standards for government
organizations), US Congress’s “Single Audit Actof
1984”
Other organizations influencing
accounting standard setting
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Cost Accounting Standards Board (CASB)
Income tax laws
Securities Industry Associates (SIA)- represents investment bankers
and financial analysts
National Association of State Auditors, Controllers, and Treasurers
Financial Executives Institute (FEI) – active committees, research,
conferences
Institute of Management Accountants (IMA) – committees,
foundation, research
American Accounting Association (AAA) – theoretical research,
publications
Institute of Internal Auditors (IIA)- research, committees
Generally accepted accounting
principles (GAAP)
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The conventions, rules, and procedures necessary to
define accounting practice at a particular time.
Two functions
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Measurement
Disclosure
Financial statements must be in conformity with
GAAP in order for CPA’s to express an opinion on
them
Pre-Codification Hierarchy of GAAP
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Level A
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Level B
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AcSEC practice bulletins, EITFs, SEC speeches
Level D
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AICPA Industry guides, SOPs, FASB technical bulletins
Level C
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FASB statements, APBs, ARBs, SEC Rules (10K, 8K)
AICPA interpretations, FASB implementation guides,
industry practices, uncleared SOPs
Level E
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APB statements, AICPA issue papers, FASB concepts
statements, IASB statements, journal articles, textbooks
Post-Codification GAAP
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Two levels (Figure 3-5)
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Authoritative
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Non-authoritative
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Most prior levels A-D, some level E
Most level E and some level D
If a non-governmental source is not found in
the Codification, it is not GAAP
Accounting Authoritative SupportFigure 3-7
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Primary Support
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General Application and Special Application (FASB
standards, AICPA SOPs)
Secondary Support
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Official publications of bodies and other sources (SEC
staff bulletins, FASB technical bulletins)
Reading a pronouncement
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Introduction
Background
Board’s conclusion
Opinion or statement
Effective date
Illustrations
Required disclosures