Wiley GAAP

Practical Implementation Guide and Workbook

Barry J. Epstein, Nadira M. Saafir

• Publisher: Wiley
• Year: 2010
• ISBN:
  9780470645888
• Edition: 2
• Topic: Studienhilfen
• Subtopic: CPA-Studienführer (Certified Public Accountant)

Wiley GAAP Workbook provides easy-to-understand guidance and clarity to practical applications of GAAP. Enhancing your comprehension of GAAP to enable practical application of a variety of situations that you may encounter in practice, this workbook and guide simplifies application of GAAP standards and interpretations to specific real-world situations.

• Provides easy-to-understand clarity and guidance on interpretation and application of the overwhelming and voluminous GAAP standards
• Offers explanations supplemented with examples, case studies, solutions, and illustrations for enhanced understanding of GAAP
• Includes newly issued accounting pronouncements and information on the GAAP codification

Wiley GAAP: Practical Implementation Guide and Workbook is a quick reference guide on Generally Accepted Accounting Principles and their application with easy to understand outlines of FASB standards, practical insights, case studies with solutions, illustrations, and multiple choice questions with solutions. It greatly facilitates understanding of the practical implementation issues involved in applying these complex rules-based standards.

Chapter 1

RESEARCHING GAAP

BACKGROUND AND INTRODUCTION

Overview of GAAP

This chapter provides an overview of generally accepted accounting principles (GAAP), including the processes involved in its development.

GAAP Defined

The phrase “generally accepted accounting principles” is a technical accounting term that encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. It includes not only broad guidelines of general application but also detailed practices and procedures. Those conventions, rules, and procedures provide a standard by which to measure financial presentations.

—U.S. Auditing Standards Board, AU §411

OBJECTIVE OF GAAP REPORTING

Generally accepted accounting principles (GAAP) are concerned with the measurement of economic activity, the timing when such measurements are to be made and recorded, the disclosures surrounding this activity, and the preparation and presentation of summarized economic information in the form of financial statements.

There are two broad categories of accounting principles: those dealing with recognition and measurement, and those dealing with presentation and disclosure.

Recognition and measurement principles determine when and how transactions and events items enter the accounting cycle and impact the financial statements. These quantitative standards require economic information to be reflected numerically.

Presentation and disclosure principles involve qualitative considerations regarding information that is deemed an essential ingredient of a full set of financial statements, the absence or inappropriate presentation of which would make the financial statements materially misleading.

Disclosure principles complement recognition principles by explaining assumptions underlying the numerical information and by providing additional information about accounting policies, contingencies, uncertainties, and other matters that are essential to fully understand the performance and financial condition of the reporting entity.

WHO CREATED GAAP?

Over time, different professional and statutory bodies have been given responsibility for the promulgation of GAAP, with multiple organizations often sharing this responsibility. All GAAP established by earlier standard-setting bodies, to the extent not withdrawn or superseded, continues in effect. GAAP in effect as of July 1, 2009, have been incorporated in the Accounting Standards Codification (ASC) of the Financial Accounting Standards Board (FASB), and that promulgated hereinafter will be set forth as changes to ASC and not as freestanding pronouncements, such as FASB statements.

Committee on Accounting Procedure

The 1929 market crash led to the first serious attempt to create formalized generally accepted accounting principles in 1930, in the hope that a set of uniform and stringent financial reporting requirements would prevent a recurrence. The American Institute of Accountants (which in 1957 was renamed the American Institute of Certified Public Accountants [AICPA]) created a special committee to work with the New York Stock Exchange toward the goal of establishing standards for accounting procedures. The special committee recommended five rules to the Exchange, published in 1938 as Accounting Research Bulletin (ARB) 1 of the Committee on Accounting Procedure. The Committee subsequently published 51 such Bulletins, including ARB 43, which consolidated and superseded all prior bulletins and also attempted to achieve uniformity in accounting terminology. However, its limited resources and lack of serious research efforts in support of its pronouncements were questioned in the late 1950s as a number of very complex controversial topics loomed on the horizon.

Accounting Principles Board

In response, the Accounting Principles Board (APB) was created to facilitate the development of principles that were to be based primarily on the research of a separate Accounting Research Division of the AICPA. The Division was to undertake extensive research, publish its findings, and then permit the APB to take the lead in the discussions that would ensue concerning accounting principles and practices. The Board’s authority was enforced primarily through its prestige and Rule 203 of the AICPA Code of Professional Conduct. Furthermore, formal approval of Board issuances by the Securities and Exchange Commission (SEC) gave additional support to its activities.

During the Board’s 14 years of existence, it issued 31 authoritative Opinions plus 4 nonauthoritative Statements. The Board made only scant use of the efforts of the Accounting Research Division, which published 15 research studies during its lifetime, and the respective agendas of the two bodies were independently arrived at. The general opinion was that the APB did not, ultimately, operate differently or more effectively than had the Committee on Accounting Procedure, resulting in calls for its replacement.

Financial Accounting Standards Board

Based on findings by the Wheat Study Group, the independent Financial Accounting Standards Board (FASB) was created in 1972. The Board currently consists of five members (until 2008, there were seven full-time members) having diverse backgrounds in public accounting, private industry, and academia. The Board is assisted by a staff of professionals that conducts research and works directly with the Board. FASB is recognized as authoritative through Financial Reporting Release (FRR) 1 of the SEC and through Rule 203 of the AICPA Code of Professional Conduct.

FASB is an independent body, relying on the Financial Accounting Foundation for selection of its members and approval of its budgets. FASB is supported by the sale of its publications and by fees assessed on all public companies (imposed under the Sarbanes-Oxley Act of 2002) based on their market capitalizations. The Board of Trustees of the Foundation is composed of members of the

• American Accounting Association

• American Institute of Certified Public Accountants

• CFA Institute

• Financial Executives International

• Government Finance Officers Association

• Institute of Management Accountants

• National Association of State Auditors, Comptrollers, and Treasurers

• Securities Industry Association

From its inception through the mid-2009 implementation of the Accounting Standards Codification (discussed below), the Board issued several types of pronouncements.¹ The most important of these were Statements of Financial Accounting Standards and the FASB Interpretations, the latter of which were used to clarify or elaborate on existing Statements or pronouncements of predecessor bodies. Under the GAAP hierarchy that existed prior to mid-2009, FASB Standards and Interpretations constituted category A GAAP, which also included FASB Staff Positions—a more recent form of official guidance—and the Board’s FAS 133 implementation issues. Technical Bulletins, which were formerly category B GAAP, usually addressed issues not covered directly by existing standards and were primarily used to provide guidance where it was not expected to be costly or require a major change in practice. Bulletins were discussed at Board meetings and subject to Board veto. Both Technical Bulletins and Interpretations were designed to be responsive to implementation and practice problems on relatively narrow subjects.

The FASB staff was empowered to issue Implementation Guides and Staff Positions, which were included in category D of the former GAAP hierarchy. In a question-and-answer format, these implementation guides addressed specific questions that arose when a Standard was initially issued. FASB Staff Positions (FSP), of which many were produced over several years through mid- 2009, were responses to questions on appropriate application of FASB literature that were expected to have widespread relevance. Implementation guides and Staff Positions were drafted by the staff and then issued, provided that a majority of the FASB Board members did not object.

Effective July 1, 2009, all codified GAAP was placed in a single level of the hierarchy (a second, lower level contains what formerly was defined as category E, consisting of scholarly writings, texts and guides by private-sector authors, guidance by other relevant bodies, etc.). The formerly important distinctions among categories A to D have completely evaporated.

American Institute of Certified Public Accountants (AICPA)

The Accounting Standards Executive Committee (AcSEC) has been the senior technical committee at the AICPA. It was authorized to set accounting standards and to speak for the AICPA on accounting matters. These were prepared largely through the work of various AICPA committees and task forces. AcSEC issued Statements of Position (SOPs) and industry audit and accounting guides (AAG), which were reviewed and cleared by the FASB and thus constituted category B GAAP under the former hierarchy. SOPs provided guidance on financial accounting and reporting issues. AAGs were intended to provide guidance to auditors in examining and reporting on financial statements of entities in specific industries and provided standards on accounting problems unique to a particular industry. AcSEC Practice Bulletins (formerly category C GAAP) usually provided guidance on very narrowly defined accounting issues. Effective November 2002, however, FASB reclaimed the sole authority to promulgate general-purpose GAAP, relegating AcSEC to the issuance of industry-specific accounting and auditing standards. Its role in the future has not yet been made clear.

Emerging Issues Task Force (EITF)

The Emerging Issues Task Force (EITF), formed by FASB in 1984 to assist in identifying current or emerging issues and implementation problems before divergent practices become entrenched, has most often restricted its attention to narrow issues. Task Force members have been drawn primarily from public accounting firms but also included individuals who would be aware of issues and practices that should be considered by the group. Nonvoting representatives of the SEC and the FASB attend EITF for discussion purposes.

In terms of operations, an issues paper is prepared for each EITF agenda item; after discussion, if a consensus is reached, the consensus is referred to the FASB for ratification. Absent a consensus, the matter may end up on FASB’s agenda or be resolved by the SEC, or may simply remain unresolved, with no standard-setting body currently considering it.

FASB has historically published a volume of EITF Abstracts, which are summaries of each Issue Paper and the results of Task Force discussion. Under the Accounting Standards Codification process, there will be no freestanding EITF consensuses (nor FASB Statements, etc.) but rather only amendments to or replacements of specific provisions in the Codification, issued as Accounting Standards Updates (ASU).

Effective status of consensuses. Although EITF pronouncements were technically category C GAAP, they were so specialized that generally there had been no salient category A or B GAAP on the respective topics, making the consensuses the highest-ranking guidance. The SEC was of the view that Task Force consensuses constituted GAAP for public companies, and it would question any accounting that differed from them. The SEC believed that the EITF supplied a public forum to discuss accounting concerns and assist in providing advice, and it had always been supportive of the Task Force’s work.

Discussion topics. The EITF also previously published Discussion Issues, which were FASB and SEC staff announcements regarding technical matters that were deemed important but that did not relate specifically to a numbered EITF issue. These announcements were designed to help provide guidance on the application of relevant accounting pronouncements. These were increasingly infrequent over recent years, and it is anticipated that further discussion issues will not be produced.

Other Sources

Not all GAAP resulted from a deliberative process and the issuance of pronouncements by authoritative bodies. Historically, certain principles and practices evolved into acceptability without formal adoption of standards. Examples include straight-line and declining balance depreciation methods and last-in, first-out (LIFO) and first-in, first-out (FIFO) inventory costing methods. There are also many disclosure principles that evolved into general accounting practice after first being required by the SEC in submissions made to it—for example, reconciliations of the effective and statutory tax rates. Even much of the content of statements of financial position and income statements has evolved over the years in the absence of adopted standards. These other sources of GAAP remain relevant and will be found in the second (i.e., nonauthoritative) level of the new hierarchy.

ACCOUNTING STANDARDS CODIFICATION

Following a costly five-year effort, FASB in 2008 largely completed its project to codify GAAP. After a one-year test period, FASB determined that the codification would become effective July 1, 2009, superseding all existing GAAP literature.

The accounting standards Codification eliminated the multilevel hierarchy that previously existed in favor of a simple bifurcation between authoritative and nonauthoritative guidance. The Codification does not change GAAP, per se, but instead introduces a new, more readily accessible, user-friendly online research system. It reorganizes the multitude of GAAP pronouncements into about 90 accounting topics and displays all topics using a consistent structure. The Codification also includes relevant SEC guidance, which follows the same topical structure used in the Codification. This structure permits real-time updating as new standards are released and offers many other advantages, although users first will have to incur the substantial fixed cost of learning the new system.

HOW IS GAAP CREATED?

For many decades, GAAP has been created by the promulgation of standards and interpretations by the bodies granted statutory and professional authority to make such rules. Prior to the ASC, the FASB and AICPA both long adhered to rigorous “due process” when creating new guidance in category A and category B GAAP. The goal was to involve constituents who would be affected by the newly issued guidance, so that any new standards would result in information that would more meaningfully report economic activity without attempting to influence behavior in any particular direction. The FASB’s due process procedures are described next. (The AICPA followed similar procedures but in the future it will have a reduced role.) Due process will remain as a guiding principle in the overall development of GAAP under the ASC structure.

Due Process prior to ASC. The FASB received requests for new standards from its diverse constituency, which includes reporting entities, auditors, industry groups, users, the EITF, and the SEC. Requests for action may have included suggestions for new topics as well as for reconsideration of existing pronouncements. For each major project added to its technical agenda, the FASB appointed an advisory task force of ap...