1. Accounting standard setting has been characterized as a political process. Discuss this proposition giving an example.
2. Explain how management's discussion and analysis of its operations and liquidity may be helpful to investors.
3. In a recent press release, Foot Locker Inc. reported that its fiscal first-quarter net income fell 46% due to losses related to discontinued operations, but earnings from continuing operations jumped 19% amid a modest increase in sales. The specialty athletic retailer said net was $20 million for the quarter ended May 4, compared with net of $37 million a year earlier. The latest results included a loss of $18 million from discontinued operations. Last year, the company had earnings of $5 million, or four cents a share, from discontinued operations. Foot Locker said earnings from continuing operations were $38 million, compared with $32 million a year earlier. Discuss how Foot Locker's press release relates to its earnings quality.
1. The process of setting accounting standards has been often considered as a political process. Changes in standard can have significant impact on companies, investors, and creditors. A change in accounting standard can have a huge redistribution of wealth in the economy. Hence the process of setting accounting standards is a complex task. The board involved in setting standards must access potential economic impact of a change in standard on various interest groups. One of the major consequences expected from the process is that the new standard would provide better information to external users and thus improve resource distribution. However the dilemma faced by accounting agencies is to balance the accounting considerations and political considerations resulting from the change. To overcome this dilemma the board takes substantial steps to gather as much information as possible before issuing an accounting standard involving alternative accounting treatments for an economic transaction. The accounting standard setting procedure involves following steps:
1. Identification of problem: An issue in reporting is identified
2. The task force: consists of knowledgeable persons appointed to give advice to the board
3. Research and analysis: the issue is investigated by technical staff
4. Discussion Memorandum: a detailed analysis of problem and alternative solutions is prepared
5. Public response: Public hearings are held to ...
The expert characterized political processes.