Accounting Information: Regulatory Framework and Codification

Users of Accounting Information

  • Owners/Managers

  • Creditors

  • Stockholders

Capital Allocation Process

  • 1. Financial Reporting: Information provided by a company to assist users in making capital allocation decisions.

  • 2. Users: Present and potential investors and creditors utilize financial reports to inform their capital allocation decisions.

  • 3. Capital Allocation: The process of determining how and at what cost money is allocated among competing interests.

Notes to Financial Statements

  • Purpose: To provide disclosure required by Generally Accepted Accounting Principles (GAAP).

Objective of Financial Reporting

  • To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.

  • Companies prepare general-purpose financial statements to provide information to a wide variety of users at the least cost.

  • Equity investors and creditors are the primary users of these statements.

  • Companies are viewed separately from their owners (entity perspective).

  • Investors assess a company’s ability to generate net cash inflows and management’s ability to protect and enhance the capital providers’ investments (decision usefulness).

Securities and Exchange Commission (SEC)

  • Established by the Securities Exchange Act of 1934.

  • Deals with accounting and reporting for public companies.

  • Encourages a private standard-setting body (FASB).

  • Requires public companies to adhere to GAAP.

  • Has oversight and enforcement authority.

Financial Accounting Foundation (FAF)

  • Selects members of the FASB and their advisory councils.

  • Funds their activities.

  • Exercises general oversight.

Financial Accounting Standards Board (FASB)

  • Establishes and improves standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information.

Financial Accounting Standards Advisory Council (FASAC)

  • Consults on major policy issues, technical issues, project priorities, and the selection and organization of task forces.

Organizational Structure for Setting Accounting Standards

  • 1. Financial Accounting Foundation (FAF)

    • Selects members of FASB and advisory councils.

    • Exercises general oversight.

  • 2. Financial Accounting Standards Board (FASB)

    • Sets the standards.

  • 3. Financial Accounting Standards Advisory Council (FASAC)

    • Consults on major policy issues, technical issues, project priorities, and task force organization.

American Institute of Certified Public Accountants (AICPA)

  • A national professional organization.

  • Established the International Accounting Standards Board (IASB).

International Accounting Standards Board (IASB)

  • Used in over 120 countries.

FASB Due Process

  • 1. Topics are identified and placed on the board’s agenda.

  • 2. Research and analysis are conducted, and preliminary views of pros and cons are issued.

  • 3. A public hearing on the proposed standard is held.

  • 4. The board evaluates research and public response and issues an exposure draft.

  • 5. The board evaluates responses, changes the exposure draft if necessary, and then issues a final standard.

Types of Pronouncements

  • Accounting Standards Updates

  • Financial Accounting Concepts

FASB Codification

  • Designed to provide all authoritative literature related to a topic.

  • Simplifies user access to all authoritative U.S. GAAP.

  • Establishes the way GAAP is documented, presented, and updated.

  • Eliminates non-essential information.

Codification Framework Example (Topic 310 Receivables)

  • Topic: 310 Receivables

    • Subtopics:

    • 10 Overall

    • 40 Troubled Debt Restructurings by Creditors

    • Sections:

    • 30 Initial Measurements

    • 35 Subsequent Measurements

    • Paragraphs:

    • 47 Loans and Trade Receivables Not Held for Sale

Key Terms and Organizations in Financial Reporting

  • Financial Accounting Standards Board (FASB): U.S. organization established to improve standards of financial reporting for the guidance and education of the public, including issuers, auditors, and users of financial statements.

  • American Institute of Certified Public Accountants (AICPA): National professional organization of practicing certified public accountants.

  • Generally Accepted Accounting Principles (GAAP): Common set of standards and protocols established by an authoritative accounting rule-making body or accepted as appropriate due to universal application in practice.

  • Securities and Exchange Commission (SEC): Federal agency that administers the Securities Act of 1934 and other acts. Most companies that issue securities to the public or are listed on stock exchanges are required to file audited GAAP financial statements with the SEC.

  • International Accounting Standards Board (IASB): International organization established to improve standards of financial reporting for the guidance and education of the public, including issuers, auditors, and users of financial statements. Statements apply to many countries outside the United States.

  • Public-Private Partnership: Reflects the SEC’s support for the FASB by indicating that financial statements conforming to standards set by the FASB are presumed to have authoritative support.

  • Codification: Provides in one place all the authoritative accounting literature related to a topic.

  • Statements of Financial Accounting Concepts: Series that sets forth fundamental objectives and concepts that the FASB uses in developing standards of financial accounting and reporting.