Even though accounting records go back hundreds of years, th
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Case 1-1
Even though accounting records go back hundreds of years, there was little effort to develop accounting standards until the 1900s. The first major effort to develop accounting standards in the United States came in 1939 when the American Institute of Certified Public Accountants formed the Committee on Accounting Procedures. As the number of standards increased, an issue called "standards overload" emerged. Essentially, the charge of "standards overload" is that there are too many accounting standards and that the standards are too complicated. Many individuals charging that standards overload is a problem maintain that more professional judgment should be allowed in financial accounting. Some individuals take a position that selected standards should not apply to nonpublic companies. Others take a position that "little" companies should be exempt from selected standards. There has been some selective exclusion from standards in the past. Examples of selective exclusion are the following:
1. Statement of Financial Accounting Standards No. 21, "Suspension of the Reporting of Earnings per Share and Segment Information by Nonpublic Enterprises." "Although the presentation of earnings per share and segment information is not required in the financial statements of nonpublic enterprises, any such information that is presented in the financial statements of nonpublic enterprises shall be consistent with the requirements of APB Opinion No. 15 and FASB Statement No. 14."
2. Statement of Financial Accounting Standards No. 33, "Financial Reporting and Changing Prices."
This statement required supplemental reporting on the effects of price changes. Only large public companies were required to present this information on a supplementary basis.
Required
a. Financial statements should aid the user of the statements in making decisions. In your opinion, would the user of the statements be aided if there were a distinction between financial reporting standards for public vs. nonpublic companies? Between little and big companies?
b. In your opinion, would CPAs favor a distinction between financial reporting standards for public vs. nonpublic companies? Discuss.
c. In your opinion, would small business owner-managers favor a distinction between financial reporting standards for small and large companies? Discuss.
d. In your opinion, would CPAs in a small CPA firm view standards overload as a bigger problem than CPAs in a large CPA firm? Discuss.
e. Comment on standards overload, considering Statement of Financial Accounting Concepts No. 1, "Objectives of Financial Reporting by Business Enterprises." Particularly consider the following objective:
Financial reporting should provide information useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. The information should be comprehensible to those having a reasonable understanding of business and economic activities and willing to study the information with reasonable diligence.
Case 2-4
The FASB and the IASB have made progress towards convergence. The IFRS standards are considered to be more principles based than the U.S. rules-based GAAP. As of 2007, the IFRSs filled approximately 2,000 pages of accounting regulations.* When an IFRS or interpretation does not exist, then judgment must be used when applying an accounting policy. As of 2007, U.S. GAAP comprised over 2,000 separate pronouncements. Many of the U.S. pronouncements were dozens of pages, issued by numerous bodies.
Required
a. "The IFRS standards are considered to be more principles based than the U.S. rules-based GAAP." Comment on the implications of this statement, including the legal implications.
b. U.S. GAAP has been considered by many to be the best GAAP in the world. Should the United States give up its GAAP? Case RULES OR FEEL?
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Solution Summary
Even though accounting records go back hundreds of years, there was little effort to develop accounting standards until the 1900s. The first major effort to develop accounting standards in the United States came in 1939 when the American Institute of Certified Public Accountants formed the Committee on Accounting Procedures. As the number of standards increased, an issue called "standards overload" emerged. Essentially, the charge of "standards overload" is that there are too many accounting standards and that the standards are too complicated. Many individuals charging that standards overload is a problem maintain that more professional judgment should be allowed in financial accounting. Some individuals take a position that selected standards should not apply to nonpublic companies. Others take a position that "little" companies should be exempt from selected standards. There has been some selective exclusion from standards in the past. Examples of selective exclusion are the following:
1. Statement of Financial Accounting Standards No. 21, "Suspension of the Reporting of Earnings per Share and Segment Information by Nonpublic Enterprises." "Although the presentation of earnings per share and segment information is not required in the financial statements of nonpublic enterprises, any such information that is presented in the financial statements of nonpublic enterprises shall be consistent with the requirements of APB Opinion No. 15 and FASB Statement No. 14."
2. Statement of Financial Accounting Standards No. 33, "Financial Reporting and Changing Prices."
This statement required supplemental reporting on the effects of price changes. Only large public companies were required to present this information on a supplementary basis.
Required
a. Financial statements should aid the user of the statements in making decisions. In your opinion, would the user of the statements be aided if there were a distinction between financial reporting standards for public vs. nonpublic companies? Between little and big companies?
b. In your opinion, would CPAs favor a distinction between financial reporting standards for public vs. nonpublic companies? Discuss.
c. In your opinion, would small business owner-managers favor a distinction between financial reporting standards for small and large companies? Discuss.
d. In your opinion, would CPAs in a small CPA firm view standards overload as a bigger problem than CPAs in a large CPA firm? Discuss.
e. Comment on standards overload, considering Statement of Financial Accounting Concepts No. 1, "Objectives of Financial Reporting by Business Enterprises." Particularly consider the following objective:
Financial reporting should provide information useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. The information should be comprehensible to those having a reasonable understanding of business and economic activities and willing to study the information with reasonable diligence.
Case 2-4
The FASB and the IASB have made progress towards convergence. The IFRS standards are considered to be more principles based than the U.S. rules-based GAAP. As of 2007, the IFRSs filled approximately 2,000 pages of accounting regulations.* When an IFRS or interpretation does not exist, then judgment must be used when applying an accounting policy. As of 2007, U.S. GAAP comprised over 2,000 separate pronouncements.â? Many of the U.S. pronouncements were dozens of pages, issued by numerous bodies.
Required
a. "The IFRS standards are considered to be more principles based than the U.S. rules-based GAAP." Comment on the implications of this statement, including the legal implications.
b. U.S. GAAP has been considered by many to be the best GAAP in the world. Should the United States give up its GAAP? Case RULES OR FEEL?
Solution Preview
a. Financial statements should aid the user of the statements in making decisions. In your opinion, would the user of the statements be aided if there were a distinction between financial reporting standards for public vs. nonpublic companies? Between little and big companies?
-- There should be minor differences in the comparison of public to nonpublic companies. The main focus needs to be on the user of the financial statement, as the situation suggests. The main user for the public company is the investor, and the company's creditors. The financial statements need to be detailed enough to provide the investor and creditor with an accurate, no holds barred depiction of the company's financial position. Necessary disclosures should be made, and all should be in order. This allows the user to make the most reasonable decisions regarding the company, to determine if the investor or creditor's money is at stake, or is reasonably secure. When we look at private companies, the main user is generally the internal user, and the occasional creditor. Because our audience is different, the financial statement should be catered to the end user in this case, also. The proper disclosures should still be made, and the same general information released, but the level of detail should not be as extensive as it is for a public company. Both companies follow GAAP, and the public company must comply with all SOX and SEC regulations, and we can see by the requirements of SOX and from the SEC that even in this sense, more detail is not only suggested for public companies, it's actually required by law. In ...
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