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Chapter 1: Q11CA (page 25)

Presented below are three models for setting GAAP.

  1. The purely political approach, where national legislative action decrees GAAP.
  2. The private, professional approach, where GAAP is set and enforced by private professional actions only.
  3. The public/ private mixed approach, where GAAP is basically set by private-sector bodies that behave as though they were public agencies and whose standards to a great extent are enforced through governmental agencies.

Instructions

  1. Which of these three models best describes standard-setting in the United States? Provide justification for your answer.
  2. Why do companies, financial analysts, labor unions, industry trade associations, and others take such an active interest in standard-setting?
  3. Cite an example of a group other than the FASB that attempts to establish accounting standards. Speculate as to why another group might wish to set its own standards.

Short Answer

Expert verified

(a) The public or private mixed-method shows the way rules are set up in the United States. It is because the SEC has the final authority to set GAAP but has selected to allow the private sector to advance these standards.

(b) Apparently, reported accounting numbers impact the distribution of scarce resources. 91影视 are directed where required at returns equivalent to perceived risk.

(c) The attempt made by Congress to decree certain accounting practices, especially to assist progressing industries. Other groups might wish to set GAAP because of the inability of the FASB to sort out accounting matters.

Step by step solution

01

Meaning of GAAP

GAAP, also known as generally accepted accounting principles, is defined as a definite set of accounting rules, procedures, and standards issued by the Financial Accounting Standards Board (FASB).

02

Explanation for the statement ‘a’

The public or private merged method emerges as the method principles set up in the United States. In many ways, the Financial Accounting Standards Board (FASB) is a non-governmental agency in that its declaration must be adhered to as the SEC has stretched effort for this method. The absolute power rests in the hands of the SEC to set up GAAP but has selected to grant the private sector to progress these standards. By obtaining the standards set by the FASB as reliable, it has accorded much authority to the FASB.

03

Explanation for the statement ‘b’

Publicly listed accounting numbers affect the distribution of limited resources. 91影视 are channelized where required at returns equivalent to anticipated risk. Therefore, the listed accounting numbers have financial effects in that resources are transmitted among organizations and individuals due to these numbers. It is not astonishing then that person afflicted by these numbers will be highly interested in any proposed variations in the economical reporting environment.

04

Explanation for the statement ‘c’

The Accounting Standards Executive Committee (ACSEC of the AICPA), among other classes, has disclosed a probable challenge to the sole authority of the FASB to set accounting standards.Moreover, Congress has been aiming to enact certain accounting practices to assist excruciating industries.

Some probable causes why other categories might wish to set GAAP are:

  1. Since these standards have financial effects and thus certain classes would choose to make their standards to ensure they obtain the right treatment.
  2. Some believe that the FASB cannot constitute GAAP in particular areas.

For instance, many have believed that the FASB should not constitute GAAP for not-for-profit enterprises because the issues are new and not well versed by the FASB.

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Most popular questions from this chapter

What was the Committee on Accounting Procedure, and what were its accomplishments and failings?

Briefly explain the meaning of decision-usefulness in the context of financial reporting.

In what ways it felt that the pronouncements issued by the Financial Accounting Standards Board would carry greater weight than the opinions issued by the Accounting Principles Board?

(FASB Role in Rule-making) A press release announcing the appointment of the trustees of the new Financial Accounting Foundation stated that the Financial Accounting Standards Board (to be appointed by the trustees)鈥濃�ill become the established authority for setting accounting principles under which corporations report to the shareholders and others鈥� (AICPA news release July 20,1972).

Instructions

  1. Identify the sponsoring organization of the FASB and the process by which the FASB arrives at a decision and issues an accounting standard.
  2. Indicate the major types of pronouncements issued by the FASB and the purpose of each of these pronouncements.

Some accountants have politicization in the development and acceptance of generally accepted accounting principles (i.e., rule-making) is taking place. Some use the term 鈥減oliticization鈥� in a narrow sense to mean the influence by governmental agencies, particularly the securities and Exchange Commission, on the development of generally accepted accounting principles. Others use it more broadly to mean the compromise that results when the bodies responsible for developing generally accepted accounting principles are pressured by interest groups (SEC, American Accounting Association, businesses through their various organizations, Institute of Management Accountants, financial analysts, bankers, lawyers, and so on).Instructions

(a) The Committee on Accounting Procedure of the AICPA was established in the mid-to late 1930s and functioned until 1959, at which time the Accounting Principles Board came into existence. In 1973, the Financial Accounting Standards Board was formed and the APB went out of existence. Do the reasons these groups were formed, their methods of operation while in existence, and the reasons for the demise of the first two indicate an increasing politicization (as the term is used in the broad sense) of accounting standard setting? Explain your answer by indicating how the CAP, the APB, and the FASB operated or operate. Cite specific developments that tend to support your answer.

(b) What arguments can be raised to support the 鈥減oliticization鈥� of accounting rule-making?

(c) What arguments can be raised against the 鈥減oliticization鈥� of accounting rule-making?
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