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14-2 Accounting Principles and Reporting Standards Section 1: Generally Accepted Accounting Principles Chapter 14 Section Objectives 1.Understand the process used to develop generally accepted accounting principles. 2.Identify the major standards-setting bodies and their roles in the standard-setting process. 3.Describe the users and uses of financial reports.

14-3 Generally Accepted Accounting Principles (GAAP) Ensure that financial statements are meaningful and useful. Are used whether the business is large or small. Allow financial statements of different companies to be compared. Allow a company to compare its own financial statements from period to period.

14-4 Public sector government represented by SEC In the United States, accounting principles are developed through a cooperative effort between the public sector and private sector. Private sector business represented by FASB Objective 1 Understand the process used to develop generally accepted accounting principles

14-5 Securities and Exchange Commission Regulates the financial reporting of publicly held corporations. Determines the form and content of accounting reports filed by companies under its jurisdiction. Has authority to define accounting terms and to prescribe accounting principles. Lets the accounting profession develop principles and standards, but has the final authority.

14-6 Created by the Sarbanes-Oxley Act. Is a private sector, non-profit corporation whose purpose is to oversee the CPA firms auditing publicly-held companies. Has the power to set auditing, quality control, ethics, independence and other standards for CPA firms engaged in auditing publicly-held companies. The Public Company Accounting Oversight Board

14-7 Financial Accounting Standards Board Seven member board — each having distinguished accounting backgrounds — who are full-time employees. Responsible for developing financial accounting and reporting standards and principles. Develops and issues Statements of Financial Accounting Standards that govern the preparation of financial reports by nongovernmental agencies. Has issued about 150 standards that the SEC recognizes as authoritative.

14-8 American Institute of Certified Public Accountants (AICPA) In the past, GAAP were developed by AICPA committee. In 1973 the AICPA and other organizations formed the FASB. The AICPA requires its members to confirm that audited companies follow the FASB Statements of Financial Accounting Standards.

14-9 Federal and State Agencies Require detailed systems of accounting for public utilities including railroad and electric power industries. Issue income tax rules for companies (IRS). Some companies adopt tax accounting rules for financial records, provided the rules don’t conflict with GAAP.

14-10 Other Organizations AAA (American Accounting Association) NYSE (New York Stock Exchange) IASB (International Accounting Standards Board)

14-11 The FASB has concluded that financial reporting rules should focus on providing information to current and potential investors and creditors in making investment and credit decisions. The focus is not on tax authorities management regulatory agencies Objective 3 Describe the Users and Uses of Financial Reports

14-12 Accounting Principles and Reporting Standards Section 2: The FASB’s Conceptual Framework of Accounting Chapter 14 Section Objectives 4.Identify and explain the qualitative characteristics of accounting information. 5.Describe and explain the basic assumptions about accounting reports. 6.Explain and apply the basic principles of accounting. 7.Describe and apply the modifying constraints on accounting principles.

14-13 FASB’s conceptual framework of accounting can be divided into four categories: Qualitative Characteristics Basic Assumptions Basic Accounting Principles Modifying Constraints

14-14 Qualitative Characteristics Usefulness Understandability Relevance Reliability Neutrality Comparability Consistency Objective 4 Identify and explain the qualitative characteristics of accounting information

14-15 Underlying Assumptions Separate Economic Entity Going Concern Monetary Unit Periodicity of Income Objective 5 Describe and explain the basic assumptions about accounting reports

14-16 General Principles Historical Cost Basis Revenue Recognition Matching Full Disclosure Objective 6 Explain and apply the basic principles of accounting

14-17 Modifying Constraints Materiality Cost-Benefit Test Conservatism Industry Practice Objective 7 Describe and apply the modifying constraints on accounting principles