STANDARD FORMATION MODULE 1-2 1Accounting Standard Formation

ACCOUNTING STANDARDS  Objectives of Financial Reporting  Standard Setters  AICPA (CAP, APB), the “old”  SEC, the “true”  FASB, the “appointed”  GASB, the “other”  IASB, the “new” GAAP – Generally Accepted Accounting Principles 2Accounting Standard Formation

PURPOSE OF THIS SECTION Determine how accounting rules are made. THE RULESTHE RULES Generally Accepted Accounting Principles Rules for accounting are called Generally Accepted Accounting Principles (or “GAAP” for short). Accounting Standard Formation3

OBJECTIVES OF FINANCIAL REPORTING (  Concept Statement 1)  Making rational investment and credit decisions  Assess amounts, timing, and uncertainty of future cash flows  Portray economic resources and claims to resources. Accounting Standard Formation4

STANDARD SETTERS Who Makes the Rules? PASTPAST: Committee on Accounting Procedures (CAP) – issued Accounting Research Bulletins (ARBs) from 1939 to Accounting Principles Board (APB) – issued APB Opinions from 1959 to NOWNOW: with legal power Securities and Exchange Commission (SEC) – government agency with legal power to create GAAP; delegates to FASB with delegated responsibility Financial Accounting Standards Board – independent organization with delegated responsibility to create GAAP FUTUREFUTURE: International Accounting Standards Board - develop a single set of global accounting standards Accounting Standard Formation5 These did not work !

American Institute of Certified Public Accountants STANDARD SETTERS American Institute of Certified Public Accountants National professional organization for CPAs.National professional organization for CPAs. IN THE PASTIN THE PAST: The AICPA created committees to form GAAP: Committee on Accounting Procedures (CAP) Accounting Principles Board (APB) NOWNOW: The AICPA funds the Accounting Standards Executive Committee (AcSec) which issues: Auditing and AccountingGuidelinesAuditing and Accounting Guidelines – booklets summarizing auditing practices for certain industries Statements of Position (SOP)Statements of Position (SOP) – guidelines for issues not yet addressed by the FASB Practice BulletinsPractice Bulletins – guidelines for issues not likely to be addressed by the FASB The AICPA also develops and grades the CPA exam. Go to Accounting Standard Formation6 The “old” standard setter

The Securities and Exchange Commission STANDARD SETTERS The Securities and Exchange Commission Accounting Standard Formation7 Governmental agency that regulates:Governmental agency that regulates: issuance of securities, and financial reporting of publicly-traded corporations The SECThe SEC Requires US GAAP for companies traded on US Exchanges Delegates the formation of GAAP to FASB Intervenes in the formation of GAAP when deemed necessary Has allowed international standards for publicly-traded, non- US companies since 2010 The “official” standard setter

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Financial Accounting Standards Board STANDARD SETTERS Financial Accounting Standards Board The SEC has the legal right to regulate accounting BUT BUT, standard setting is delegated to the FASB. The FASB is The FASB is: financed and maintained by the private sector since 1973 comprised of seven remunerated members (5 year term) issues statements and interpretations that provide guidance on accounting disclosure Go to Accounting Standard Formation9 The “appointed” standard setter

Governmental Accounting Standards Board STANDARD SETTERS Governmental Accounting Standards Board Governmental Accounting Standards Board municipalstate The Governmental Accounting Standards Board (GASB) sets standards for municipal and state governments. Accounting Standard Formation10 Go to FederalFederal standards are set by the U. S. Government Accountability Office (GAO). The “other” standard setters

International Accounting Standards Committee STANDARD SETTERS International Accounting Standards Committee Accounting Standard Formation11 The International Accounting Standards Board was formed in 1973 to develop a single set of global accounting standards. Based in London, UK Comprised of Comprised of 14 members with no geographical representation (6 auditors, 3 preparers, 3 users, 1 academician, 1 regulator) Appointed by Appointed by 19 trustees (6 North America, 6 Europe, 4 Asia-Pacific, 3 any area) ObjectiveObjective: to improve and harmonize regulations, accounting standards, and procedures relating to the presentation of financial statements. The “new” standard setter

International Financial Reporting StandardsInternational Financial Reporting Standards (International GAAP) IASB The IASB issues International Financial Reporting Standards (IFRS) which: principles rules Tends to be principles based rather than rules based. fair value historical cost Favors fair value rather than historical cost. Accounting Standard Formation12

International Financial Reporting StandardsInternational Financial Reporting Standards (International GAAP) Current status of adoption: Over 120 countries, including the European Union, Australia, and New Zealand now require IFRS Canada, Japan, Korea, and India adopted in 2011 The SEC allows foreign companies traded on US exchanges to use IFRS Current goal is for the US to adopt by 2015 Accounting Standard Formation13 I’m not sure what we will be doing yet.

Market Capitalization in Millions USD May 2009 ExchangeMarket Value New York Stock Exchange9,574, NASDAQ2,773, Total US12,347, Euronext2,262, London Stock Exchange2,204, Frankfurt Stock Exchange (Deutsche Börse)1,132, Madrid Stock Exchange (Bolsas y Mercados Españoles) 1,084, Swiss Exchange854, Nordic Stock Exchange Group OMX664, Milan Stock Exchange (Borsa Italiana)554, Total Europe8,757, Tokyo Stock Exchange3,102, Shanghai Stock Exchange2,069, Hong Kong Stock Exchange1,773, Bombay Stock Exchange1,032, National Stock Exchange of India968, Korea Exchange640, Shenzhen Stock Exchange563, Total Asia10,150, Toronto Stock Exchange1,347, São Paulo Stock Exchange920, Australian Securities Exchange839, Johannesburg Securities Exchange605, Total Other3,712, Accounting Standard Formation14

QUESTIONS TO THINK ABOUT better internationalnational  Is it better to use international or national accounting rules? stricterUS international  Which are stricter, US or international accounting rules? lower incomeUSinternational  Which results in lower income, US or international rules? harder to understand US international  Which rules are harder to understand US or international? Accounting Standard Formation15 I wonder …

International Financial Reporting StandardsInternational Financial Reporting Standards (International GAAP) What is convergence? Accounting Standard Formation16 An attempt to make IFRS and US GAAP similar (taking the best from both).

ADVANTAGES AND DISADVANTAGES OF ADOPTING IFRS What are advantages of the US adopting IFRS? Accounting Standard Formation17 What are disadvantages of the US adopting IFRS? Simplicity – 17,000 pages (U.S. GAAP) compared to 2,500 (IFRS) Comparability – same accounting as foreign competitors Markets – possibly greater access to international capital  Loss of sovereignty over national commerce  Some believe IFRS rules are inferior  Cost of conversion

International Financial Reporting Standards Differences from US GAAP AmericanotherHow different is American GAAP from other GAAP? Latest study is on differences between IFRS and US GAAP Time Period: 2004 to 2006 Sample: 75 EU cross-listed firms Findings:  Differences between IFRS and US GAAP decreased from 2004 to  In 2006, 28% of firms reported ROE 5% or higher under IFRS compared to US GAAP  In 2006, 10% reported ROE 5% lower under IFRS compared to US GAAP Source: Henry, Lin, and Yang Accounting Horizons 23(2) 2009 pp Accounting Standard Formation18

THE SIDES Mary Schapiro (Chairman of US Securities and Exchange Commission)  does not feel bound by the previous administration  concerned about lack of consistency in application of IFRS  concerned about cost to switch to IFRS from U.S. GAAP  believes IASB may lack independence David Tweedie (Chairman of the International Accounting Standards Board)  says IASB gets criticism over the “favored-nation” status toward US  notes that other countries are running out of patience waiting for SEC approval of transition roadmap  notes contradiction of US having heavy representation on IASB, but does not accept it Accounting Standard Formation19