Accounting Standard Collection (ASC)
An online filing cabinet which groups all authoritative rules into roughly
ninety topics.
Currently the authoritative source of U.S. accounting and reporting
standards for governmental entities, in addition to guidance from the
SEC.
Developed by the FASB in 2009.
Organized into topics, subtopics, sections, subsections, and paragraphs.
Topics, the broadest category of financial reporting guidance, is grouped
into four areas.
Broad transactions include business contributions and derivatives.
Financial statement accounts, such as Inventory, Receivables, or
Revenues.
Industries where specialized GAAP unique to an industry or type of
activity is described.
Presentation matters which relate to financial statements or notes.
Subtopics represent numbered subdivisions of a topic and are generally
distinguished by the type of score.
Sections are numbered subdivisions of Subtopics which denote the
nature of the content.
Subsections and Paragraphs allow further segregation and navigation of
content.
Accounting Standard Updates (ASU)
The pre-Codification standards for the ASC.
Necessary to understand the ASC.
Completeness
A company’s financial statements include all the pertinent information
about its economic activities.
Conformity Value
A company’s financial statements either confirm or alter the decision-
maker’s earlier beliefs about the company.
Determining Accounting Standards in United States
The SEC has the ultimate authority to determine the rules for preparing
financial statements in publicly traded companies in the United States.
However, it looks to private sector organizations to establish these rules.
The FASB currently sets the accounting standards in the United States.
However, prior to the establishment of the FASB, the American Institute
of Certified Public Accounting (AICPA) had the primary responsibility of
setting accounting standards in the United States.
The 2002 Sarbanes-Oxley Act (SOX) created a private sector, nonprofit
corporation, known as the Public Company Accounting Oversight Board
(PACOB) to regulate the audits of public companies.
The PACOB has at least two roles.
To establish the statement for auditing and ethics at public accounting
firms.
To inspect and investigate the auditing practices of public accounting
companies.
Determining Accounting Standards Outside United States
The growth of global investing has spurred the development of
worldwide accounting standards, which are written by the International
Accounting Standards Board (IASB).
The IASB works to facilitate accounting standards, promote their
worldwide acceptance, and achieve greater convergence of financial
reporting, regulations, standards, and procedures across countries.
The IASB has issued sixteen International Financial Reporting Standards
(IFRS) and still retains many of the forty-one International Accounting
Standards (IAS) which were issued by the IASB’s predecessor, the
International Accounting Standards Committee (IASC).
FASB Accounting Standards Collection
A GAAP hierarchy.
Developed by the AICPA in 1975 as a resource to answer accountant’s
financial reporting questions.
Does not eliminate the need to search voluminous GAAP literature for
answers.
Faithful Representation
A company’s financial statements accurately reflect its economic
activities.
Freedom from Material Error
All the judgmental information on a company’s financial statements
contains some minimum level of accuracy, even though they will not all
be exact.
Generally Accepted Accounting Principles (GAAP)
A network of conventions, rules, and procedures which govern financial
principles.
Continue to develop and grow in response to changing business
conditions.
The goal is to ensure that a company’s financial statements clearly
reflect its current economic position and performance. To achieve this
goal, a company’s financial statements should possess certain
quantitative and qualitative characteristics that make the reported
financial information useful.
Primary characteristics include faithful representation and relevance.
Component characteristics include completeness, neutrality, and
freedom from material error, which all relate to faithful
representation, and confirmatory value, materiality, and predictive
value, which all relate to relevance.
Enhancing characteristics include comparability, timeliness,
understandability, and verifiability.
Materiality
The omission or misstatement of a company’s financial statements is
material if, considering the surrounding circumstances, it affects the
decision of the reasonable person who relies on the company’s financial
statements.
Whether a misstatement is material depends on both the quantitative
considerations (the amount of the misstatement) and the qualitative
considerations (the possible impact of the misstatement).
Quantitative material thresholds are inadequate because they fail to
recognize how even small misstatements can impact the users’
perceptions of the company.
Neutrality
A company’s financial information cannot be selected to favor one set of
interested parties over another.
Politics of Accounting Standards
In choosing among financial reporting alternatives, the FASB must serve
a diverse constituency, which includes auditors, preparers, and users of
financial statements, as well as the public interest.
The preferences of any one constituent may differ substantially from
some other constituents. Therefore, to ensure that their voices are heard
in the standard-setting process, professional associations, industry trade
groups, regulatory agencies, individual companies, and even prominent
individuals exert pressure on the FASB as new accounting rules are
developed.
The disgruntled constituents can campaign against the FASB and
sometimes request that the SEC step in and force the FASB to change
their standards.
Predictive Value
A company’s financial statements improve a decision-maker's ability to
forecast the future outcomes of the company’s past or present events.
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