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Chapter 1: Question 22Q (page 23)

Some individuals have indicated that the FASB must be cognizant of the economic consequences of its pronouncements. What is meant by 鈥渆conomic consequences鈥�? What dangers exist if politics play too much of role in the development of GAAP?

Short Answer

Expert verified

Economic consequences imply the consequences of accounting reports on the financial positions of issuers and the decision-making behavior emerging from the consequence.

Politicians' involvement can manipulate GAAP rules and regulations, and so the standards may not be more reliable.

Step by step solution

01

Meaning of economic consequences

The term economic consequences is defined as the impact of accounting reports on the wealth of the users of financial statements and decision-making occurring from the impact. Remunerative behavior has an adverse financial outcome for the users of financial statements.

02

Dangers occurring in case of involvement of politics in the development of GAAP

Generally Accepted Accounting Principles (GAAP) is considered a political product similar to any law. In case too many politicians are caught up in the advancement role of GAAP, financial standards will lose their credibility, and the financial reporting rules will stand up for rich and powerful companies.

Moreover, suppose the information is outlined in a way that shows that investing in a certain firm requires less risk than the actual, or is outlined in a way to encourage investment in a certain economic sector. In that case, financial reporting will suffer an unparallel loss of credibility.

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Most popular questions from this chapter

(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.

If you had to explain or define 鈥済enerally accepted accounting principles or standards,鈥� What essential characteristics would you explain in your explanation?

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

ETHICS (Rule-Making Issues) When the FASB issues new pronouncements, the implementation date is usually 12 months from date of issuance, with early implementation encouraged. Karen Weller, controller, discusses with her financial vice president the need for early implementation of a rule that would result in a fairer presentation of the company鈥檚 financial condition and earnings. When the financial vice president determines that early implementation of the rule will adversely affect the reported net income for the year, he discourages Weller from implementing the rule until it is required.

Instructions:Answer the following questions.(c) What does Weller have to gain by advocacy of early implementation?

Accounting standard-setters use the following process in establishing accounting standards:

  1. Research, exposure draft, discussion paper, standard.
  2. Discussion paper, research, exposure draft, standard.
  3. Research, preliminary views, discussion paper, standard.
  4. Research, discussion paper, exposure draft, standard.
See all solutions

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