This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
I have been asked to prepare a business report on the FASB (Financial Accounting Standards Board) for this publicly-held accounting firm. I will include the history of the FASB, requirements imposed on public corporations, and the impact FASB will have on the investment community. I had no idea of the vast amount of information on the FASB. I know this report is lengthy, but it was important to show you the importance of correct financial statements and how many changes the FASB does and the affects it can have. Nonetheless, my report is complete.
The FASB governs the GAAP (Generally Accepted Accounting Principles). It is assumed that these principles are adapted in financial statements unless otherwise noted. On our financial statements we have never disclosed that we do not use GAAP. So, now it is vital to make sure that we are adhering to the principles. The accounting standards are vast approaching international standards. In fact, the FASB is pushing towards a partnership of sorts with the International Accounting Standards Board. It was this junction that started the FASB and the IASB set high quality and compatible standards. So, the sooner that this company uses the GAAP, the easier it will be to continue being successful globally.
There are four main financial statements. They are: (1)Â balance sheets; (2)Â income statements; (3)Â cash flow statements; and (4)Â statements of shareholders' equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time. Cash flow statements show the exchange of money between a company and the outside world also over a period of time. The fourth financial statement, called a "statement of shareholders' equity," shows changes in the interests of the company's shareholders over time.
The vast amount of changes that the FASB does is just mind boggling. In this report I have discussed how politics play a part in the projects FASB works on, the opposition of some changes that have been made, and when the changes can be felt. It is critical that this company has access to the entire new FASB rulings.
What does the FASB stand for? It stands for the Financial Accounting Standards Board. According to Warren Reeves Fess (2002), "the FASB is the authoritative body having the primary responsibility for developing accounting principles." GAAP is the Americanized term for Generally Accepted Accounting Principles. These are the rules that accountants use to record and summarize transactions and to prepare financial statements. Accounting for Dummies (Tracy, 2001) states that unless the business makes very clear that is has prepared its financial report on a comprehensive basis of accounting other GAAP, we can assume that the business has used GAAP in reporting its cash flows and profit at the end of a financial period. Since our company doesn't state otherwise, we currently use the GAAP in our accounting financial reports. Who uses this information? From Accounting the Easy Way (Eisen, 1995), accounting information is used by everyone. Employees, investors, suppliers, and lenders are among those who use the information on the financial statements. The Balance Sheet reports what Assets, Liabilities and Owner's Equity the business has as of a certain date. The Income Statement reports the total Revenues and Expenses and the difference (Profit of Loss) for a specific period of time (month, quarter, year, etc.). The Statement of Owner's Equity (sometimes called Statement of Changes in Owner's Equity or Capital Statement) reports why and how Owner's Equity changed for a specific period of time (month, quarter, year, etc.). The Statement of Cash Flows reports the sources and uses of Cash for a specific period of time (month, quarter, year, etc.).
On one hand, popular accounting programs for small and mid-sized businesses have become more widely used more than ever before, and on the other hand, industry consolidation has significantly reduced the accounting program choices to just a handful. These choices are typically inexpensive, easy to implement, and come with little support to develop appropriate policies and procedures to ensure that the data generated by these programs is accurate and complete. The need to review this company's policy and procedures is greater now than ever. It is time to make sure that our procedures coincide with our accounting software. Our company needs to leave no stone unturned.
Reading the slew of material on the FASB and GAAP, I was keeping in mind that we are an accounting corporation and what kind of impact the FASB would have on our company. I have done research on the history and mission of the FASB, the principles of GAAP, purpose of financial statements and the how and why to implement policies and procedures.
Purpose and Mission of FASB
From the FASB website, I found the mission of the FASB is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information. To accomplish its mission, the FASB acts to:
Improve the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability and on the qualities of comparability and consistency;
Keep standards current to reflect changes in methods of doing business and changes in the economic environment;
Consider promptly any significant areas of deficiency in financial reporting that might be addressed through the standard-setting process;
Promote the international convergence of accounting standards concurrent with improving the quality of financial reporting; and
Improve the common understanding of the nature and purposes of information contained in financial reports.
It is vital to stay up-to-date on the codification. The FASB is constant making new guidelines and ruling. All updates are communicated through an Accounting Standards Update. The FASB is the single source of authoritative U.S. GAAP. They offer a "Professional View" for an annual subscription of $850.00 (eight hundred fifty dollars). This offers a cross reference report, glossary terms, "What's New" links and much more.
According to More than Numbers, (King, 2006) The FASB consists of seven (7) paid, full-time employees, each working for a renewable five-year term. As of 1973 when the FASB came about, a CPA certification was not required for Board membership and the board members were to be paid.
Analysis: The FASB determines different ways companies can disclose their bottom line of their financial statements. We must be able to stay up to date on the changes. Purchasing the "Professional View" is the best way to get the most up to date and valuable information for our practices as a publically-traded accounting firm. Using the FASB and the GAAP leaves fewer questions about our accounting practices and assures a consistent outcome.
I have provided a list of principles from Wikipedia. All of these principles are general and used in GAAP. All principles derive from tradition. BecauseÂ the framework is general, it requires interpretation, and often re-interpretation, in light of new business transactions. Consequently, sitting on top of the simple framework is a growing pile of literally hundreds of accounting standards. But complexity in the rules is unavoidable for at least two reasons.
Principles are established by the FASB. The principles with explanations are as follows:
Principle of consistency: This principle states that when a business has once fixed a method for the accounting treatment of an item, it will enter all similar items that follow in exactly the same way.
Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status.
Principle of regularity: Regularity can be defined as conformity to enforced rules and laws.
Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company.
Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, revenue with an expense, etc.
Principle of prudence: This principle aims at showing the reality "as is": one should not try to make things look prettier than they are.
Principle of continuity: When stating financial information, one should assume that the business will not be interrupted.
Principle of periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. This is also known as accruals.
Principle of Full Disclosure/Materiality: All information and values pertaining to the financial position of a business must be disclosed in the records.
Principle of Utmost Good Faith: All the information regarding to the firm should be disclosed to the insurer before the insurance policy is taken.
Analysis: Seeing the principles, it is recognized that our company already adheres to the GAAP. The major accounting assumptions include the following: the business entity assumption, the continuity assumption, the periodic and timely reporting assumption, and the monetary unit assumption. It is assumed that we use GAAP since we do not disclose we do not. Following GAAP in today's market is essential.
When there is a change in the accounting standards issued by the FASB, it is required to change our accounting principles. These can be voluntary as well as involuntary. When changes are done it should be disclosed on the financial statement. Financial statements are basically categorized in four ways, balance sheet, income statement, cash flow statement and statement of retained earnings. Each type of financial statement indicates the different activity occurring in the business. In Law of Business (Ashcroft, 2005), a financial statement is a writing signed by the debtor and the secured party that contains the address of the secured party, the mailing address of the debtor, and a statement indicating the types of or describing the collateral. A copy of the security agreement may serve as a financing statement if it contains the required items. Financial statements are used by investors, lenders, suppliers.
Accounting for Dummies (Tracy, 2001) explains the importance of correct financial statements. If a business has financial statements that are found to be misleading or terribly incorrect, the top executives can be sued by investors and/or lenders for damages. They depend on the financials to be correct and it is the managers need to understand this importance. Unfortunately, they cannot plead ignorance of the laws should they have to go to court.
Financial statement analysis is a process which examines past and current financial data for the purpose of evaluating performance and estimating future risks and potential. Financial statement analysis is used by investors, creditors, security analysts, bank lending officers, managers, taxing authorities, regulatory agencies, labor unions, customers, and many other parties who rely on financial data for making economic decisions about a company. The total of the three sections of the cash flow statement equals net cash flow: CFF + CFI + CFO = net cash flow. We might be tempted to use net cash flow as a performance measure, but the main problem is that it includes financing flows. Specifically, it could be abnormally high simply because the company issued debt to raise cash, or abnormally low because it spent cash in order to retire debt.
Analysis: All aspects of true financial statements are vital to a business. I cannot stress the importance of correct reporting. Using GAAP is one way to assure accurate reporting. The objectives of financial reporting are designed to meet the needs of investors and creditors for decision making purpose. The primary focus of financial reporting is information about earnings and its components. Information useful in evaluating the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securities or loans is basic to many investment decisions. These and other concerns are the basic objectives of financial reporting
The FASB makes changes to the accounting standards for a multitude of reasons. The main reason is because rules can be interpreted in just as many ways. In FASB Rule Changes (Landy, 2009), it is stated, "By adjusting the rules on the mark-to-market accounting and on accounting for other-than-temporary impairment changes, the FASB has given companies more flexibility to value assets when prices may not be accurately reflected in distressed markets.
According to the Accounting college textbook (Fess, Reeve, & Warren 2002), disclosure of a change should include the nature of the change, justification of the change, the effect on the current year's net income, and the cumulative effect of the change on the net income of the prior periods. There is always something to be left desired with aspects of accounting. The balance sheet has major limitations. First, the balance sheet does not reflect current value or fair market value because accountants apply the historical cost principle in valuing and reporting assets and liabilities. Second, the balance sheet omits many items that have financial value to the business. For example, the value of the company's human resources including managerial skills is often significant but is not reported. In addition, professional judgment and estimates are often used in the preparation of balance sheets and can possibly impair the usefulness of the statements.
At this time, fair value rules are not consistent. Companies can treat a financial asset however they please. It is determined by the company, but if traded publically, market value must be used. Fair-value assets set a storm of fury for some. Banks' attack on fair value was self-serving. This said it was "obvious" markets had failed and that companies should be allowed to suspend fair value for "sound" assets that had suffered "undue valuation". The FASB says that fair-value is essential to provide transparency for investors. Banks' financial statements could be modified to show assets at cost as well as fair value. This was done so if investors or regulators wanted to use traditional accounting they could.
The most obvious solution is for the FASB to make a ruling that all financial assets and liabilities must be fair value. This is a project that FABS is proposing at this time. Times are hard for banks and investors. The financial crisis has almost all but eliminated mark-to market rules. Government and the FASB are not seeing eye-to-eye on fair value. According to All's Fair (Economist, 2008), Representative Democrat from Massachusetts warned the FASB by stating, "Don't make us tell you what to do."
Some changes from the FASB are not felt immediately. According to "What were the Effects of FAS No. 87" (Elebash, 1991), the principal objectives of FAS No.87 were to: provide a more meaningful and comparable measure of pension cost in the income statement; improve reporting of financial positions in the balance sheet; and require additional disclosure. The authors had done a survey to see the effects of No.87 and to see if it had caused a change in investment strategies. From the results of responded questionnaires, public companies reported that they had an increase of profits. These could be due to several variances. On this survey, 84% (eighty-four) said that No. 87 has not affected their investment policy at all. Though a staggering 88% (eighty-eight) of companies say that this has had no affect on choosing to be more or less conservative in their investing, almost half of the participants stated that FAS No.87 caused concern about increased volatility in the firm's income statement. The implementation of the statement caused an increase on reported profits for most corporations.
From an article written in BusinessWeek (Lavelle 2005) Time to Start Weighing the Options, the author discusses stock options and the changes the FASB had made towards them. The FASB required companies to expense their stock options. That ended one of the greatest accounting debates of all time. When a change is made by the FASB as broad as this, companies were looking at cutting their expenses by any legal means possible. They changed their vesting schedule to trim options cost. But that was just one strategy, companies are continually discovering other ways to take advantage of new rules that are imposed.
Back in 1991, they understood that changes with a recession accompanied by low interest rates and a declining stock market would strongly affect the best estimate assumptions required by the statement. Sponsors may be encouraged to take another look at switching from defined benefit to defined contribution pension plans or to less desirable pension policies. Most of the changes that had affected companies were administrative and some costs did increase accordingly. But 65% (sixty-five) of participants concede that they are now reasonably well satisfied with the statement. They could not have foreseen the crash of stock market and basically all economy in 2009, but they had already plans to see it through.
In an article in BusinessWeek (Francis, 2009) called The New FASB Rules, Back to Square On? Theo Francis states that recently the Obama Administration was moving to try to stabilize the market. Though there were moves in place, associations were saying that not enough was being done. The creation of accounting standards is a political process. While it could be argued that in the U.S. the accounting profession sets a standard for self-regulation, in actuality, FASB standards are the result of complicated political processes and negotiation. Those with political power have a vested interest in domestic standards.
Analysis: I could literally write a book on all of the changes of ruling that the FASB has done through the years, in fact many book have been written. Anytime there is change, there are going to be opposition. Thomas Ream (Ream, 2005) sent an editorial to Forbes magazine about how volatile the stock option being an asset is an example of accounting slippery. When it comes to investments the cash impact on a business from a grant of an employee stock option is zero. Even being in the accounting field, there are some terms and processes that are confusing. All changes must be disclosed in our financial statements. To avoid accounting problems in the future, we should adhere to the GAAP principles to assure accuracy and consistency.
Standardizing Policies and Procedures
A process is a definable, repeatable, predictable, measurable set of activities or tasks that produce or navigate the work (Hightower, 2008). There are three levels of governance. They are market stability, corporate, and internal. The purpose of standardizing policies is to improve effectiveness and efficiently in processing accounting transactions and to guide the interpretation and analysis for improved financial recording. As our company implements standardized policies and procedures, our culture and company environment will be more defined.
Accounting policies describe rules for generation, transport and storage of accounting data. These rules are used for the configuration of the accounting process. An accounting policy consists of one or more rules, each having a condition part and an action part. The condition part expresses under which condition the policy should be enforced. The following attributes are examples for variables in a policy condition statement. Accounting procedures are those rules and practices that are associated with the operations of an accounting system and that lead to the development of financial statements. Accounting procedures include the methods, practices, and techniques used to carry out accounting objectives and to implement accounting principles. For example, last-in, first out (LIFO) and straight-line depreciation are examples of accounting for inventory and buildings. An accounting procedure should be selected in a given circumstance if its use reflects generally accepted accounting principles and if it is appropriate to record, process, and report the event or transaction.
Analysis: Having standardized policies and procedures leaves less room for error in our reporting. Accounting assumption provides the foundation for the structure of financial accounting theory and explains why financial information is presented in a given manner. GAAP represent the standards and practices that a firm must use in preparing external financial statements. GAAP or standards are prescribed by authoritative bodies such as FASB, and are based on theoretical as well as practical considerations. These principles evolve and change in response to changes in the economic environment. I have a copy of "Accounting and Finance Policies and Procedures" to aid us through this process.
Purchase the Professional View: This purchase is going to help aid our financial statements for our clients. Staying up to date is vital and in keeping with the FASB changing keeps our records consistent. You can purchase this from the FASB website for $850.00 a year. As I have stated, there is a discount for multi-users.
Disclose the changes in financial statement: If financial statements for prior periods are going to be presented for any reason, then they should be restated as if the change had been made in the prior periods. This is also the time to separate out unusual items to allow investors to isolate the effects of these items on income and cash flows.
Implement Policy & Procedures in accordance to GAAP: Use the resources of the web and reading material to gather information on how to put together accounting policies and procedures. It is important for all employees to follow the guidelines. Failure to follow rules could result in producing misleading financial reports and the company could face legal issues.
Companies are required to disclose the accounting policies that are most important to the portrayal of the company's financial condition and results. These often require management's most difficult, subjective or complex judgments. Finally, U.S. accounting rules are always in flux. At any given time, the Financial Accounting Standards Board (FASB) is working on several accounting projects. You can see the status of the projects at their website. But even as rules change and tighten in their application, companies will continue to have plenty of choices in their accounting. So, if there is a single point to this business report, it is that you should not accept a single number, such as basic or diluted earnings per share (EPS), without looking "under the hood" at its constituent elements.
By using GAAP standards, we can have an easier transition into international accounting if this company should choose to do so. A harmonization of accounting policy would help provide a "level playing field" globally. I think it is necessary to adhere to the FASB and GAAP principals to continuing to be a successful publically traded accounting firm.