Accounting: The Language of Business - Vol. 2 (Intermediate: Part 5)

I worked in accounting for two and a half years, realized that wasn't what I wanted to do with the rest of my life, and decided I was just going to give comedy a try.

Bob Newhart

The Financial Reporting Environment 

(Part E)

by

Charles Lamson

The Standard-Setting Structure. As illustrated by Exhibit 1.7, the FASB is part of a larger organizational structure that also includes the

• Financial Accounting Foundation (FAF)

• Governmental Accounting Standards Board (GASB) 

•  Financial Accounting Standards Advisory Council (FASAC) 

• Governmental Accounting Standards Advisory Council (GASAC)

•  Emerging Issues Task Force (EITF)

• Private Company Council (PCC)

EXHIBIT 1.7   Standard-Setting Organizational Structure in the United States

The FAF is responsible for the oversight, administration, and finances of the Financial Accounting Standards Board (FASB). They obtain funds primarily through the Public Company Accounting Oversight Board (PCAOB), which assesses charges known as accounting support fees against issuers of equity securities based on their market capitalization (Market capitalization is the total value of a company's equity shares. It is equal to the market price per share multiplied by the total number of equity shares outstanding.). Other sources of funds include publications, subscriptions, and contributions from state and local governments for the GASB.

The GASB sets standards for state and local governmental units. The FASAC exists to advise FASB on technical issues and the GASAC serves as an advisory board to the GASB.

The EITF was formed in 1984 to assist the FASB by addressing issues that are not as broad in scope as those found on the FASB agenda. For example, EITF agenda items often include industry-specific issues. The EITF is made up of 13 representatives, including preparers, auditors, and financial statement users. The group reaches an EITF consensus when three or fewer members object to a proposed position that has been exposed for public comment. Although the FASB members do not vote on the consensus at the EITF meetings, all consensus decisions must be approved by a majority of the FASB members before they become a part of U.S. GAAP.

In 2012, the PCC was established to set accounting standards for U.S. private companies. Before this time, if a private company was required to present financial information according to U.S., it followed the same rules as public companies with minor exceptions. Now the PCC is responsible for determining whether modification to existing U.S. GAAP standards are warranted for private companies, and, if so, it has the responsibility of developing, deliberating, and voting on these modifications. However, the FASB retains the authority to make the final decision as to incorporating these changes into U.S. GAAP for private companies. 

Standard-Setting process. FASB follows a seven-step process to issue a final standard. 

IFRS Standard Setting

We will now discuss the history of global standard setting, the structure of the standard-setting body, and the process for global standard setting.

History of Global Standard Setting: IFRS

Until recently, most countries established their own accounting standards. For instance, France, Germany, and Australia each had its own GAAP. The GAAP of each nation varied due to the country's specific needs for accounting information. Factors such as the country's sources of capital, its culture, tax laws, or other regulations influenced the development of their accounting standards. Given almost 200 countries in the world and almost as many sets of different GAAP standards, global investors and creditors struggled to compare accounting standards when analyzing companies and making investment and credit decisions.

Recognizing the need for comfortable accounting information internationally, the professional accounting organizations from 10 countries formed the International Accounting Standards Committee (IASC) in 1973. At that time, the IASC consisted of up to 16 part-time volunteer members setting International Accounting Standards (IAS). Companies in each country could adopt IAS on a voluntary basis. However, the IASC was criticized for allowing highly flexible accounting standards. As a result, most major developed countries continued to require the use of their own standards.

As global business relationships continue to grow, the need for a comfortable and rigorous international set of accounting standards became apparent. In the 1990s, the IASC initiated an improvement project to develop a cohesive and uniform set of "core accounting standards" to meet the needs of investors in cross-border offerings and exchange listings, allowing companies to report under IAS within their jurisdictions and on their exchanges.

Around the same time, the IASC began to recognize the limitations in its existing organizational structure. As a result, the International Accounting Standards Board (IASB) replaced the IASC in 2001. The IASB now promulgates standards called International Financial Reporting Standards (IFRS) .

The IASB also developed a set of accounting standards to address the needs of private companies, called IFRS for small– and medium–size entities (IFRS for SMEs). IFRS for SMEs is based on IFRS but eliminates certain costly reporting requirements that are designed to provide information to external financial statement users. IFRS for SMEs was developed because some countries require all public and private companies to prepare financial statements under IFRS. These countries can then allow private companies the option to use the least costly IFRS for SMEs. 

*GORDON, RAEDY, SANNELLA, 2005, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 10-12*

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