Chapter 3
The Environment of
Accounting
Research
Learning Objectives
The SEC’s Role
 The FASB
 The GASB
 Other Organizations influencing
accounting standards
 Authoritative pronouncements
 Meaning and levels of GAAP

The accounting environment
 Accounting standards
are influenced by:
 Federal
 Disagreements
bodies
among constituents
 Tax laws
 Professional
 Specialized industries
organizations
 Inconsistencies in practice
 International
influences
 Litigation concerns
 Public concerns
The Securities and Exchange
Commission (SEC)
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

The Securities and Exchange
Commission (SEC) (contd.)

SEC’s Office of the Chief Accountant
(OCA) establishes accounting policies
followed by the SEC and is divided into
three groups.
 Accounting
 Professional Practice
 International Affairs
The SEC (contd.)

Four SEC divisions consulted by the OCA
groups:
 Corporate finance
 Market regulation
 Enforcement
 Investment management
The SEC (contd.)
SEC delegated accounting standard setting
to the FASB, but has an oversight function
 SEC rules and regulations
 Definitions
 Regulations – compilations of rules –
solicitation of proxies
 Procedural matters- proceedings

The Financial Accounting
Standards Board (FASB)


Develop high quality financial reporting
standards (GAAP)
Many entities involved:





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 (contd.)

Pronouncements:

Statement of Financial Accounting Standards
(SFAS’s)


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 (contd.)


Technical Bulletins – provide timely guidance on
implementation issues
Emerging Issues Task Force – established in
1984 – addresses issues not covered in
pronouncements


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
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

FASB Due Process (contd.)
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

Elements ofConcepts
financial
Statements of FinancialAccounting
statements
–
(SFAC’s) – describe concepts
and relationships
measurement,
that underlie financial accounting
standards
recognition, display
 Capital maintenance
 Unit of measure
 Criteria for measurement
 Qualitative
characteristics
Concept Statements
Have not gone through due process
 SFAC1 – Objectives of financial reporting
 SFAC 2 – Qualitative characteristics
 SFAC 3 – replaced by 6
 SFAC 4 – Objectives of financial reporting
of nonbusiness organizations

Concept Statements (contd.)
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)
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.

American Institute of Certified
Public Accountants (AICPA) (contd.)



The Accounting Standards Division through the
Accounting Standards Executive Committee
(AcSEC) 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, Accounting Trends and
Techniques
The Governmental Accounting
Standards Board (GASB)
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 (contd.)



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
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

Other organizations influencing
accounting standard setting (contd.)
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)
The conventions, rules, and procedures
necessary to define accounting practice at a
particular time.
 Two functions

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
Level A
 FASB statements, APBs, ARBs, SEC
Rules (10K, 8K)
 Level B
 AICPA Industry guides, SOPs, FASB
technical bulletins
 Level C
 AcSEC practice bulletins, EITFs, SEC
speeches

Pre-Codification Hierarchy of
GAAP (contd.)
Level D
 AICPA interpretations, FASB
implementation guides, industry
practices, uncleared SOPs
 Level E
 APB statements, AICPA issue papers,
FASB concepts statements, IASB
statements, journal articles, textbooks

Post-Codification GAAP
Two levels (Figure 3-5)
 Authoritative
Most prior levels A-D, some level E
 Non-authoritative
Most level E and some level D
 If a non-governmental source is not found
in the Codification, it is not GAAP

Accounting Authoritative
Support- Figure 4-7
Primary Support
 General Application and Special
Application (FASB standards, AICPA
SOPs)
 Secondary Support
 Official publications of bodies and other
sources (SEC staff bulletins, FASB
technical bulletins)

Reading a Pronouncement
Introduction
 Background
 Board’s conclusion
 Opinion or statement
 Effective date
 Illustrations
 Required disclosures
