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Question 8CA

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Intermediate Accounting (Kieso)
Found in: Page 24

Short Answer

One of the major groups that has been involved in the standard-setting process is the American Institute of Certified Public Accountants. Initially, it was the primary organization that established accounting principles in the United States. Subsequently, it relinquished its power to the FASB.

Instructions

  1. Identify the two committees of the AICPA that established accounting principles prior to the establishment of the FASB.
  2. Speculate as to why these two organizations failed. In your answer, identify steps the FASB has taken to avoid failure.
  3. What is the present role of the AICPA in the rule-making environment?

  1. The two committees of the AICPA that established accounting principles prior to the establishment of the FASB include Committee on Accounting Procedure (CAP) and Accounting Principles Board (APB).
  2. The two organizations failed because of the failure of the problem-to-problem approach in providing the required structure for accounting principles and also the approach wasn’t productive enough. The steps taken by FASB to avoid failure include FASB having a full-time and lesser membership, greater autonomy, broader representation, rising independence, and well paid and formal position.
  3. The AICPA grades and advances CPA exams, it does not issue accounting guidelines.
See the step by step solution

Step by Step Solution

Meaning of Certified Public Accountants (CPA)

Certified Public Accountants are the accounting professionals who perform a detailed study of auditing, accountancy, and its similar subjects for providing services later. The authorities concerned permit CPA for revising financial statements.

Explanation for ‘a’

The committee established by AICPA before setting up the FASB includes the Committee on Accounting Procedure (CAP). During the period (1939-1959), 51 Accounting Research Bulletins (ARB) were issued by the Committee on Accounting Procedures (CAP). AICPA formed Accounting Principles Board (APB) in 1959 to replace the CAP. However, before getting substituted by the FASB, 31 official pronouncements called APB opinions were released by APB.

Explanation for ‘b’

The committee on Accounting Procedure (CAP) used a problem-to-problem-based method to overcome accounting issues but did not succeed in providing a collection of standardized accounting principles that were essential. Accounting Principles Board (APB) was created to provide such standards, but it wasn’t beneficial. Moreover, the Accounting Principles Board (APB) did not respond to the accounting abuses and usually met with opposition from various organizations.

Steps taken by FASB to prevent failure are as follows:

  • Smaller membership
  • Full-time salaried membership
  • Larger autonomy
  • Increased Independence
  • Broader representation

Explanation for ‘c’

The AICPA boosts the FASB’s efforts in the present standard-setting environment. Issues papers prepared by the Accounting Standards Executive Committee (ASEC), recognize present financial reporting issues for particular industries and present alternative treatments of the problem. Additionally, the AICPA plays a great role in advancing auditing standards with the help of the Auditing Standards Board. These standards provide rules for regulating auditing practice and for enforcing and developing professional ethics.

Most popular questions for Business-studies Textbooks

Question: CA1-17 GROUPWORK (GAAP and Economic Consequences) The following letter was sent to the SEC and the FASB by the leaders of the business community.

Dear Sirs:

The FASB has been struggling with accounting for derivatives and hedging for many years. The FASB has now developed, over the last few weeks, a new approach that it proposes to adopt as a final standard. We understand that the

Board intends to adopt this new approach as a final standard without exposing it for public comment and debate, despite the evident complexity of new approach, the speed with which it has been developed and the significant changes to the exposure draft since it was released more than one year ago. Instead, the board plans to allow only a brief review by selected parties, limited to issues of operationality and clarity, and would exclude questions as to the merits of the proposed approach.

As the FASB itself has said throughout this process, its mission does not permit it to consider matters that go beyond accounting and reporting considerations. Accordingly, the FASB may not have adequately considered the wide range of concerns that have been expressed about the derivatives and hedging proposal, including concerns related to the potential impact on the capital markets, the weakening of companies` ability to manage risk, and the adverse control implications of implementing costly and complex new rules imposed at the same time as other major initiatives, including the year 2000 issues and a single European currency. We believe that these crucial issues must be considered, if not by the FASB, then by the Securities and Exchange Commission, other regulatory agencies, or Congress.

We believe it is essential that the FASB solicit all comments in order to identify and address all material issues that may exist before issuing a final standard. We understand the desire to bring this process to a prompt conclusion, but the underlying issues are so important to this nation`s businesses, the customers they serve and the economy as a whole that expediency cannot be the dominant consideration. As a result, we urge the FASB to expose its new proposal for public comment, following the established due process procedures that are essential to acceptance of its standards, and providing sufficient time to affected parties to understand and assess the new approach.

We also urge the SEC to study the comments received in order to assess the impact that these proposed rules may have on the capital markets, on companies` risk management practices, and on management and financial controls. These vital public policy matters deserve consideration as part of the Commission`s oversight responsibilities.

We believe that these steps are essential if the FASB is to produce the best possible accounting standard while minimizing adverse economic effects and maintaining the competitiveness of U.S businesses in the international market

place.

Very truly yours, (this letter was signed by the chairs of 22 of the largest U.S companies.)

Instructions

Answer the following questions.

(a) Explain the "due process" procedures followed by the FASB in developing a financial reporting standard.

(b) What is meant by the term "economic consequences" in accounting standard-setting?

(c) What economic consequences arguments are used in this letter?

(d) What do you believe is the main point of the letter?

(e) Why do you believe a copy of this letter was sent by the business community to influential members of the U.S. Congress?

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