SEC

• The U.S. Securities and Exchange Commission (commonly known as

the SEC) is an independent agency of the United States government
which holds primary responsibility for enforcing the federal
securities laws and regulating the securities industry, the nation's
stock and options exchanges, and other electronic securities
markets. The SEC was created by section 4 of the
Securities Exchange Act of 1934 (now codified as 15 U.S.C. § 78d and
commonly referred to as the 1934 Act). In addition to the 1934 Act
that created it, the SEC enforces the Securities Act of 1933, the
Trust Indenture Act of 1939, the Investment Company Act of 1940,
the Investment Advisers Act of 1940, the
Sarbanes-Oxley Act of 2002 and other statutes.

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 Authoritative Source of SEC
The SEC has statutory authority to establish
financial accounting and reporting standards
for publicly held companies under the
Securities Exchange Act of 1934. Throughout
its history, however, the Commission’s policy
has been to rely on the private sector for this
function to the extent that the private sector
demonstrates ability to fulfill the responsibility
in the public interest.
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 FASB
• The FASB is a nongovernmental body with
seven full-time members
• FASB sets accounting standards (US GAAP) for
all companies issuing audited financial
statements
• The FASB is an independent body whose
members are required to sever all ties with
previous employers

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 United States Securities and Exchange Commission (SEC)

The SEC was created as a result of the Great Depression. At that time there was no
structure setting accounting standards. The SEC encouraged the establishment of
private standard-setting bodies through the AICPA and later the FASB, believing that
the private sector had the proper knowledge, resources, and talents. The SEC works
closely with various private organizations setting GAAP, but does not set GAAP itself.

The SEC functions as a highly effective enforcement mechanism for standards

promulgated in the private sector.
The SEC through its regulation S-X governs the form and content of the financial
statements of companies whose securities are publicly traded
Whilst financial reporting standards are developed primarily by FASB, the SEC often
arguments the FASB’s work e.g. The SEC-mandated Management Discussion and
Analysis (MD&A) provides helpful information regarding past operating results and
current financial position.

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 Securities and Exchange Commission

• A listing of SEC-required filing

– Annual report (10-K)
– Quarterly report (10-Q)
– Current report (8-K) (used to report important
events)

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 SEC and FASB Authority Sources

Congress SEC

FASB

Registered
Companies

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Financial Accounting Standards Board (FASB)

FASB has 4 major types of publications:

1) Statements of Financial Accounting Standards (SFAS) - the

most authoritative GAAP setting publications.
163 have been issued to date. (as at May 2009)
2) Statements of Financial Accounting Concepts (SFAC)- first
issued in 1978. They are part of the FASB's conceptual
framework project and set forth fundamental objectives and
concepts that the FASB use in developing future
standards. However, they are not a part of GAAP. There have
been 7 concepts published to date (as at May
2009)

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 FASB
3) FASB Interpretations - modify or extend existing standards. There have been 48 interpretations published
to date (as at May 2009)
• 4) FASB Staff Positions (FSP) offer guidance. (FASB Notes). Historically, the FASB staff has issued Staff
Implementation Guides on specific topics. In February 2003, the FASB staff began issuing future application
guidance (like that found in Staff Implementation Guides and Staff Announcements) through FASB Staff Positions
(FSP). will circulate a draft of a proposed FSP to Board members for their review. If a majority of Board members
do not object to the proposed FSP, it will be posted on the FASB Web site for comment for a period of 30 days,
which will be announced in Action Alert. That exposure allows the FASB staff and Board to adequately consider
constituent comments and concerns about the proposed FSP. At the end of the exposure period, the FASB staff
will draft the final FSP.
• Provided that a majority of the Board does not object, the final FSP will be posted to the FASB Web site and
remain there until it can be incorporated in FASB literature. This new process and form of guidance will ensure
more timely and consistent communication about the application of FASB literature.

5) FASB Technical Bulletins - guidelines on applying standards, interpretations, and opinions. Usually solves
some very
specific accounting issue that will not have a significant, lasting effect.

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 FASB Technical Bulletins
• are similar to FASB Interpretations in that they establish
enforceable standards under the AICPA's Code of
Professional Ethics.
• are not expected to have a significant impact on financial
reporting in general and provide guidance when it does not
conflict with any broad fundamental accounting principle.
• were recently discontinued by the FASB because they dealt
with specialized topics having little impact on financial
reporting in general.

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 Emerging Issues Task Force (EITF)
After new standards are issued, and in areas
where standard are nonexistent or ambiguous,
there may be a need for guidance as to proper
accounting
FASB staff (Task force members) sometimes
issues documents especially after major new
standards (such as the one on hedging); so
called Emerging Issues Task Force (EITF), which
tries to achieve consensus on technical issues
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 Emerging Issues Task Force (EITF)
• The EITF was formed in 1984 in response to the recommendations of the FASB’s
task force on timely financial reporting guidance and a FASB Invitation to
Comment on those recommendations
• The EITF is responsible for dealing with new and unusual financial transactions
that have the potential to become common (e.g. accounting for Internet based
companies).
• It acts more like a problem filter for the FASB. The EITF deals with short-term,
quickly resolvable issues, leaving long-term, more pervasive problems for the
FASB.
• Task Force members are drawn from a cross section of the FASB’s constituencies
(under FASB purview), including auditors, preparers, and users of financial
statements. The chief accountant of the Securities and Exchange Commission (or
his/her designee) attends EITF meetings regularly as an observer with the
privilege of the floor. The FASB technical director serves as chairman of the EITF.

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Please visit http://www.fasb.org/st/ for further and more updated
information for all issues promulgated by FASB

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 FASB
The Financial Accounting Standards Board (FASB) is a private,
not-for-profit organization whose primary purpose is to develop
generally accepted accounting principles (GAAP) within the United States in
the public's interest. The Securities and Exchange Commission (SEC)
designated the FASB as the organization responsible for setting accounting
standards for public companies in the U.S. It was created in 1973, replacing
the Committee on Accounting Procedure (CAP) and the
Accounting Principles Board (APB) of the
American Institute of Certified Public Accountants (AICPA).

Currently, the Financial Accounting Standards Board (FASB) is the highest

authority in establishing generally accepted accounting principles for public
and private companies, as well as non-profit entities.

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 Authoritative Source of FASB
Since 1973, the Financial Accounting Standards Board (FASB) has
been the designated organization in the private sector for
establishing standards of financial accounting. Those standards
govern the preparation of financial statements. They are officially
recognized as authoritative by the Securities and Exchange
Commission (SEC) (Financial Reporting Release No. 1, Section 101,
and reaffirmed in its April 2003 Policy Statement) and the
American Institute of Certified Public Accountants (Rule 203, Rules
of Professional Conduct, as amended May 1973 and May 1979).
Such standards are important to the efficient functioning of the
economy because investors, creditors, auditors, and others rely on
credible, transparent, and comparable financial information.

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The Mission of the Financial Accounting
Standards Board

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The Mission of the Financial Accounting
Standards Board

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 Basic objectives of US GAAP
• Financial reporting should provide information that is:
• useful to present to potential investors and creditors
and other users in making rational investment, credit,
and other financial decisions.
• helpful to present to potential investors and creditors
and other users in assessing the amounts, timing, and
uncertainty of prospective cash receipts.
• about economic resources, the claims to those
resources, and the changes in them.

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 Required Departures from GAAP
• Under the AICPA's Code of Professional Ethics under Rule 203 -
Accounting Principles, a member must depart from GAAP if
following it would lead to a material misstatement on the
financial statements, or otherwise be misleading. In the
departure the member must disclose, if practicable, the
reasons why compliance with the accounting principle would
result in a misleading financial statement. Under Rule 203-1-
Departures from Established Accounting Principles, the
departures are rare, and usually take place when there is new
legislation, the evolution of new forms of business
transactions, an unusual degree of materiality, or the existence
of conflicting industry practices.

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 SFAS 162 : Hierarchy of GAAP
• This Statement identifies the sources of
accounting principles and the framework for
selecting the principles to be used in the
preparation of financial statements of
nongovernmental entities that are presented
in conformity with generally accepted
accounting principles (GAAP) in the United
States (the GAAP hierarchy).

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FASB Due Process Steps Required by the
Rules of Procedure

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FASB Due Process Steps Required by the
Rules of Procedure
Due Process

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 AICPA AcSec Practice Bulletins
• To achieve consensus on technical issues on some
projects, especially those that are industry specific,
AICPA’s Accounting Standards Executive Committee
(AcSec) is responsible for handling its
• AICPA AcSec Practice Bulletins must be cleared by
FASB to become effective (Included in Hierarchy of
GAAP)
• “Cleared” means that the FASB has not objected to
the issuance of the guide or the statement of
position.
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 SEC Regulation
• Mission: Protect investors & maintain integrity of the
securities markets
• Established following the Great Market Crash (SEC
Act of 1934)
• SEC requires public registration, proxy statements &
annual (10-K) and quarterly (10-Q) reports, 8-K for
specific events
• Update: Sarbanes-Oxley Act of 2002 & Public
Company Accounting Oversight Board
 Accounting Regulators
• Securities & Exchange Commission (SEC)--regulates
securities markets and financial reporting (10-K, 10-
Q, 8-K)
• Financial Accounting Standards Board (FASB)--
promulgates GAAP
• International Accounting Standards Board (IASB)—
issuing International Financial Reporting Standards
(IFRS)
 U.S. Standard Setters:
1938-Present
• Committee on Accounting Procedures (CAP)
issued 51 Accounting Research Bulletins
(ARBs)--1938-59
• Accounting Principles Board (APB) issued 31
Opinions--1959-73
• Financial Accounting Standards Board (FASB)
has issued 163 Statements through 2008
(SFASs) plus other standards--1973-present
 The FASB
• Seven member board, full time, appointed by FAF,
presumed independent
• Extensive due process: agenda items, discussion
memoranda (DM), exposure drafts (ED),
pronouncements, public exposure with written &
oral comments
• Super-majority (5-2 vote) [simple majority used
1977-90]
• Standard setting a political process
Influential of US GAAP

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American Accounting Association (AAA)

• The AAA is an organisation of accounting

professors.
• As such, its influence on establishing GAAP
indirectly and long-range through researches
done by AAA members.
• These researches leans toward the theoretical
rather than the practical

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National Association of Accountants (NAA)

• The NAA is an organisation of private accountants

concerned with managerial accounting issues
• The NAA conducts research on current topics and
develops an extensive educational program.
• The NAA sponsors the “Institute of Management
Accounting (IMA)”, which prepares and
administers an examination similar to the CPA
exam. Those passing this examination are issued
a “Certificate in Management Accounting (CMA)”
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 GAAP
• Generally Accepted Accounting Principles (GAAP) are accounting
principles that have substantial authoritative support:
• In the U.S., generally accepted accounting principles, commonly
abbreviated as US GAAP or simply GAAP, are accounting rules
used to prepare, present, and report financial statements for a
wide variety of entities, including publicly-traded and privately-
held companies, non-profit organizations, and governments.
• US GAAP is not written in law but the U.S. Securities and
Exchange Commission (SEC) requires that it be followed in
financial reporting by publicly-traded companies.

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 GASB
• For local and state governments, GAAP is
determined by the
Governmental Accounting Standards Board (GASB),
which operates under a set of assumptions,
principles, and constraints, different from those of
standard private-sector GAAP.
• Financial reporting in federal government entities is
regulated by the
Federal Accounting Standards Advisory Board
(FASAB).
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 History of GAAP
• Securities and Exchange Act of 1934 was legislated for regulating securities trading on the national
exchanges, and it was under this authority that the Securities and Exchange Commission (SEC) was
created.
• The SEC is an independent quasi-judicial agency of the federal government to administer the various
acts concerning the distribution and sale of publicly held securities.
• Legal authority is also vested in the SEC to require whatever specific accounting practices it deems
necessary to protect the public.
• The SEC has elected to leave much of the determination of GAAP and the regulation of the accounting
profession to the private sector in the belief that the private sector has better knowledge and
resources.
• The United States government does not directly set accounting standards similar to many other
countries practicing under the common law system.
• Thus far most of GAAP set by accounting professions have been accepted by the SEC as its own
requirements for how accounting data and financial statements must be reported.
• On occasion the SEC may differ with the FASB over certain accounting principles, and when that
happens the SEC may issue its own ruling requiring whatever additional accounting information it
believes must be reported to the SEC and perhaps also presented in reports to investors and creditors

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 History of GAAP
• The number of parties in the private sector
have played a role in development of GAAP.
• The American Institute of Certified Public
Accountants (AICPA) and the Financial
Accounting Standard Board (FASB) have the
most influence on determination of GAAP.
• Prior the establishment of the FASB in 1973, the
AICPA was directly involved in developing GAAP
by means of CAP and ARB
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 History of GAAP
• AICPA is the accounting profession that acts as a professional
organisation representing certified public accountants (CPA) on a
national basis
• AICPA has members including CPAs in business and industry, public
practice, government, and education; student affiliates; and
international associates
• AICPA sets ethical standards for the profession and U.S. auditing
standards for audits of private companies; federal, state and local
governments; and non-profit organisations.
• From 1939 to 1959, the Committee on Accounting Procedure (CAP),a
committee run by the AICPA, was a the first private sector organisation
that had the task of setting accounting standards in the United States.
• The CAP issued Accounting Research Bulletins (ARB)

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• ARB are publications containing recommended accounting procedures
and are required by the SEC to use by corporations under their
jurisdiction.
• In all, 51 bulletins were issued by CAP from 1939 to 1959
• ARB were discontinued with the dissolution of the Committee in 1959
under a recommendation from the Special Committee on Research
Program because ARB dealt with specific problems (problem-by-
problem approach) which failed to formulate a conceptual framework.
• The Committee was replaced by the Accounting Principles Board (APB)
in 1959.
• There are currently 3 ARBs that have not been superseded by
subsequent accounting standards and are taking part in GAAP (in force
at present).

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History of GAAP : ARB

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 History of GAAP
• In 1959, the AICPA replaced CAP with Accounting Principles Board (APB)
• ARB’s mission was to develop an overall conceptual framework of US
generally accepted accounting principles (US GAAP).
• ARB issued 31 pronouncements on accounting principles known as “APB
opinions” until 1973
• APB opinions contain recommended accounting procedures. Whilst the
APB opinions were not binding on American Institute of CPAs members,
the typically required their use by corporations under their jurisdiction.
• Of the 31 APB opinions (official positions of the board) and 4 APB
statements (views of the board but not the official opinions), several
were instrumental in improving the theory and practice of significant
areas of accounting.

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 History of GAAP
• However, APB opinions have failed in establishing a coordination between broad
principles (conceptual framework) and specific issues and resulted in failure to act
promptly.
• In all, 51 bulletins were issued, however, the lack of binding authority over AICPA's
membership reduced the influence of, and compliance with the content of the
bulletins.
• Realising the need to reform the APB, leaders in the accounting profession appointed
a Study Group on the Establishment of Accounting Principles (commonly known as
the Wheat Committee for its chair Francis Wheat). This group determined that the
APB must be dissolved and a new standard-setting structure be created.
• The APB was disbanded in 1973 for the hopes that the smaller, fully-independent
known as the “Financial Accounting Standards Board (FASB)” could more effectively
create accounting standards.
• Many APB Opinions have been superseded by the FASB pronouncements; 19 opinions
still stand as part of GAAP (Unless superseded, APB opinions remain part of US GAAP)

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APB

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 History of GAAP
• In 1979, the FASB was established
• The FASB is governed by the Financial Accounting Foundation (FAF).
FAF consists of a representative from each of nine orgainisation,
namely AICPA, Financial Executive Institute, National Association of
Accountants, Financial Analysts Federation (now become known as
CFA institutes), American Accounting Association, Security Industry
Association, and three not-for-profit organisations.
• The FAF appoints the seven members of the FASB and appoints the
Financial Accounting Standards Advisory Council (FASAC) which has
a responsibility for advising the FASB and the major operating
organization in this structure the Financial Accounting Standards
Board (FASB).

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 The FASB Structure
S p o n s o rin g O rg an iz a tio ns

FAF

FASAC FASB G ASB G ASAC

D u e P ro c e ss D u e P ro c e ss

P ro no u nc e m e n ts P ro no u nc e m e n ts
FASB Organisation Structure

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 How AICPA affects GAAP
• The AICPA collects reactions of its members to
accounting issues and furnishes them to the
FASB, which considers them in developing new
standards.
• The AICPA represents the views of the profession
in cases of congressional investigations.
• The AICPA publishes a monthly magazine called
the “Journal of Accountancy” and many other
materials on accounting
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 Role of AICPA affecting GAAP
After the creation of the FASB, the AICPA established the Accounting
Standards Executive Committee (AcSEC). It publishes:

1) Audit and Accounting Guidelines, which summarizes the accounting

practices of specific industries (e.g. casinos, colleges, airlines, etc.) and
provides specific guidance on matters not addressed by FASB or GASB.

2) Statements of Position, which provides guidance on financial reporting

topics until the FASB or GASB sets standards on the issue.

3) Practice Bulletins, which indicate the AcSEC's views on narrow financial

reporting issues not considered by the FASB or the GASB.

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 Future of US GAAP
• The US GAAP provisions differ somewhat from
International Financial Reporting Standards, though
former SEC Chairman Chris Cox set out a timetable for all
U.S. companies to drop GAAP by 2016, with the largest
companies switching to IFRS as early as next year.[1
• In 2008, the Securities and Exchange Commission issued a
preliminary "roadmap" that may lead the U.S. to abandon
Generally Accepted Accounting Principles in the future (to
be determined in 2011), and to join more than 100
countries around the world instead in using the London-
based International Financial Reporting Standards. [1]

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