Accounting Conventions and Standards
Standard-Setting Groups: FASB, SEC, AICPA
There are three main organizations whose work in supporting certified public accountants (CPAs) and upholding standard accounting practices are inextricably linked with the careers of professionals in this field:
· The Financial Accounting Standards Board (FASB) is a private, nonprofit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the United States in the public’s interest.
· The US Securities and Exchange Commission (SEC) is a federal agency that holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation’s stock and options exchanges, and other electronic securities markets in the United States.
· Founded in 1887, the American Institute of Certified Public Accountants (AICPA) is a professional organization of CPAs in the United States. The AICPA has nearly 386,000 CPA members in 128 countries in business and industry, public practice, government, education, student affiliates and international associates.
The Financial Accounting Standards Board (FASB)
The Financial Accounting Standards Board (FASB) is a private, nonprofit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the United States in the public’s interest.
Under the direction of the SEC, the Committee on Accounting Procedure was created by the AICPA in 1939. It was the first private-sector organization that had the task of setting accounting standards in the United States. In 1959, the Accounting Principles Board (APB) was formed to meet the demand for more structured accounting standards. The APB issued pronouncements on accounting principles until 1973, when it was replaced by the Financial Accounting Standards Board (FASB). The APB was disbanded in the hopes that the smaller, fully independent FASB could more effectively create accounting standards. The APB and the related SEC were unable to operate completely independently of the US government.
The FASB’s mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information.
To achieve this mission, FASB has five goals:
1. Improve the usefulness of financial reporting by focusing on the primary characteristics of relevance, reliability, comparability, and consistency.
2. Keep standards current to reflect changes in methods of doing business and in the economy.
3. Consider promptly any significant areas of deficiency in financial reporting that might be improved through standard setting.
4. Promote international convergence of accounting standards concurrent with improving the quality of financial reporting.
5. Improve common understanding of the nature and purposes of information in financial reports.
The FASB sets standards based on their conceptual framework. In addition, they offer guidance on how to implement these standards, but they do not monitor companies for violations of the financial reporting standards. That is left to the SEC.
The US Securities and Exchange Commission (SEC)
The US Securities and Exchange Commission (SEC) is a federal agency that holds the primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation’s stock and options exchanges, and other electronic securities markets in the United States. The SEC was created by Section 4 of the Securities Exchange Act of 1934 (now codified as 15 U.S.C. § 78d and commonly referred to as the 1934 Act).
The SEC was established by President Franklin D. Roosevelt in 1934 as an independent, quasi-judicial regulatory agency during the Great Depression. The main reason for the creation of the SEC was to regulate the stock market and prevent corporate abuses relating to the offering and sale of securities and corporate reporting. The SEC was given the power to license and regulate stock exchanges, the companies whose securities were traded on exchanges, and the brokers and dealers who conducted the trading.
Currently, the SEC is responsible for administering seven major laws that govern the securities industry:
1. The Securities Act of 1933
2. The Securities Exchange Act of 1934
3. The Trust Indenture Act of 1939
4. The Investment Company Act of 1940
5. The Investment Advisers Act of 1940
6. The Sarbanes–Oxley Act of 2002
7. The Credit Rating Agency Reform Act of 2006
The enforcement authority given by Congress allows the SEC to bring civil enforcement actions against individuals or companies alleged to have committed accounting fraud, provided false information, or engaged in insider trading or other violations of the securities law. The SEC also works with criminal law enforcement agencies to prosecute individuals and companies alike for offenses that include a criminal violation.
To achieve its mandate, the SEC enforces the statutory requirement that public companies submit periodic reports. Quarterly and biannual reports from public companies are crucial for investors to make sound decisions in the capital markets.
The American Institute of Certified Public Accountants (AICPA)
Founded in 1887, the American Institute of Certified Public Accountants (AICPA) is the national professional organization of CPAs in the United States. The AICPA has nearly 386,000 CPA members in 128 countries in business and industry, public practice, government, education, student affiliates and international associates. It sets ethical standards for the profession and US auditing standards for audits of private companies, nonprofit organizations, and federal, state, and local governments. It also develops and grades the Uniform CPA Examination.
The AICPA’s founding established accountancy as a profession distinguished by rigorous educational requirements, high professional standards, a strict code of professional ethics, and a commitment to serving the public interest. While the AICPA sets the professional standards for the professional conduct of accountants, it plays no role in setting the standards for financial accounting.
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles (GAAP) is the standard framework for financial accounting used in any given jurisdiction.
GAAP refers to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing accounting transactions and in the preparation of financial statements.
GAAP is a codification of how CPA firms and corporations prepare and present their business income and expense, assets, and liabilities in their financial statements. GAAP is not a single accounting rule, but rather an aggregate of many rules on how to account for various transactions.
Like many other common-law countries, the United States government does not directly set accounting standards by statute. However, the US Securities and Exchange Commission (SEC) requires that US GAAP be followed in financial reporting by publicly traded companies. Currently, FASB establishes generally accepted accounting principles for public and private companies, as well as for nonprofit organizations.
Historically, accounting standards have been set by the AICPA subject to Securities and Exchange Commission regulations. The AICPA first created the Committee on Accounting Procedure in 1939, and replaced it with the Accounting Principles Board in 1951.
In 1973, the Accounting Principles Board was replaced by the FASB under the supervision of the Financial Accounting Foundation with the Financial Accounting Standards Advisory Council serving to advise and provide input on the accounting standards.
Circa 2008, the FASB issued the FASB Accounting Standards Codification, which reorganized the thousands of US GAAP pronouncements into roughly 90 accounting topics. In 2008, the SEC issued a preliminary roadmap that may lead the US to abandon GAAP in the future and to join more than 100 countries around the world already using the London-based International Financial Reporting Standards (IFRS).
As of 2010, the convergence project was underway with the FASB meeting routinely with the International Accounting Standards Board (IASB). The SEC expressed its resolve to fully adopt IFRS in the US by 2014. As the highest authority over IFRS, the IASB is becoming more important in the US.
The table below demonstrates the differences in accounting standards between GAAP and IFRS regarding classifying cash flows.
GAAP vs. IFRS Cash Flow Classification
Transaction US GAAP
The post Accounting Conventions and Standards appeared first on ExpertCustomWritings.
Assignment status: Solved by our experts