I.

STANDARD SETTING BODIES IN THE UNITED STATES A. Securities and Exchange Commission (SEC) Established by the Securities Exchange Act of 1934. All companies that issue securities in the U.S. are subject to SEC rules and regulations. Has issued public company specific accounting rules and regulations in: o Regulation S-X o Financial Reporting Releases (FRR) o Accounting Series Releases (ASR) o Interpretative Releases (IR) o Staff Accounting Bulletins (SAB) o EITF Topic D and SEC Staff Observer Comments B. Financial Accounting Standards Board (FASB) An independent full-time organization established in 1973. Has determined GAAP since then. Through 2009, issued (SITE SPIGS) o Statements of Financial Accounting Standards (SFAS) o FASB Interpretations (FIN) o FASB Technical Bulletins (FTB) o Emerging Issues Task Force Statements (EITF) o FASB Staff Positions o FASB Implementation Guides o Statements of Financial Accounting Concepts (SFAC) Has seven full-time members who serve for five-year terms and may be reappointed to one additional five-year term. Board members must sever connections with firms or institutions before joining the Board.

II.

U.S. GAAP FASB ACCOUNTING STANDARDS CODIFICATION Effective July 1, 2009, the FASB Accounting Standards Codification became the single source of authoritative nongovernmental U.S. GAAP. Accounting and Financial reporting practices not included in the Codification are not GAAP. A. Authoritative Literature Included in the Codification (FEDPRIA) Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Abstracts and Topic D Derivative Implementation Group Issues Accounting Principles Board Opinions (APBO) Accounting Research Bulletins (ARB) Accounting Interpretations American Institute of Public Accountants (AICPA)

B. The most authoritative literature is included in six sources of standards (BOSSII) Accounting Research Bulletins Accounting Principles Board Opinions FASB Statements of Financial Accounting Standards FASB Staff Positions FASB Interpretations FASB Statement 133 Implementation Issues C. Ongoing Standard-setting Process The FASB updates the ASC for new U.S. GAAP issued by the FASB and for amendments to the SEC content with Accounting Standards Updates (ASU). o Proposed FASB amendments to the ASC are issued for public comment in the form of Exposure Drafts (ED). o Majority vote of three Board members is required to approve an ED for issuance. o At end of ED public comment period, the FASB analyzes and studies all comment letters and position papers and then redeliberates on the issue. o When the Board is satisfied that all reasonable alternatives have been adequately considered, the FASB staff prepares an ASU for Board consideration. o Majority vote of three Board members is required to amend the ASC. ASU are not authoritative literature, but instead provide background information, update the Codification, and describe the basis for conclusions on changes in the ASC. All new GAAP and SEC amendments are fully integrated into the existing structure of the ASC. III. International Accounting Standards Board (IASB) Established in 2001 as part of the International Accounting Standards Committee (IASC) Foundation. Replaced the Board of International Accounting Standards Committee, which was created in 1973. Has twelve full-time members and two part-time members who are selected to provide a mix of practical experience among auditors, preparers, users, and academics. A. International Financial Reporting Interpretations Committee (IFRIC) Established in 2002 replacing the previous interpretations committee, the Standing Interpretations Committee (SIC). Appointed by the trustees of the IASC Foundation to provide guidance on newly identified financial reporting issues not addressed in the IFRSs. Assists the IASB in achieving international convergence of accounting standards.

IV.

International Financial Reporting Standards (IFRS) When the IASB was created, it adopted the International Accounting Standards (IAS) that had been issued by the Board of the International Accounting Standards Committee. The IASB issues IFRSs and related documents, including the Framework for the Preparation and Presentation of Financial Statements, exposure drafts, and other discussion documents. The term International Financial Reporting Standards includes IFRSs, IASs, and Interpretations developed by the IFRIC and the former SIC. A. Ongoing Standard-setting Process The IASB generally publishes a discussion paper as its first publication on a major new topic, although discussion papers are not required. After receiving and reviewing comments on the discussion paper, the IASB staff prepares an Exposure Draft (ED) for public comment. At least nine members of the IASB must approve an ED for issuance. At end of ED public comment period, the IASB analyzes and studies all comment letters and position papers and then re-deliberates on the issue. When satisfied that all reasonable alternatives have been adequately considered, the IASB staff drafts the IFRS. An IFRS must be approved by at least nine members of the IASB. B. Framework for the Preparation and Presentation of Financial Statements Developed by the IASB to assist in the development of future IFRSs and evaluating existing IFRSs. Provides a basis for reducing the number of alternative accounting treatments permitted by IFRSs. Similar to the FASB Conceptual Framework. The Framework is not an IFRS. In the absence of a standard or interpretation, entities are directed to refer to and consider the applicability of the concepts in the Framework when developing accounting policies. GAAPs Conceptual Framework cannot be applied to specific accounting issues.

V.

Conceptual Frameworks Underlying Financial Accounting The FASB has created a conceptual framework (set forth in pronouncements called Statements of Financial Accounting Concepts, or SFAC) that serves as a basis for all FASB pronouncements. The eight SFAC are not GAAP, but they provide a basis for financial accounting concepts for business and nonbusiness enterprises. A. SFAC No. 4 Objectives of Financial Reporting by Nonbusiness Organizations Characteristics of Nonbusiness Organizations o Significant portion of their resources come from contributions or grants. o Operating purposes are other than to provide goods or services for profit. o Lack ownership interest that can be sold, transferred, or redeemed, or that allow a claim on resources upon liquidation. Users of Financial Information of Nonbusiness Organizations o Resource providers (i.e., lenders, suppliers, employees, members, contributors, and taxpayers) o Constituents o Governing and oversight bodies o Managers Objectives of Financial Reporting of Nonbusiness Organizations o Provide information useful in making resource allocation decisions. o Provide information useful in assessing services and the ability to provide services. o Provide information useful in assessing management stewardship and performance. o Provide information about economic resources, obligations, and net resources, organization performance, the nature of and relationship between inflows and outflows, service efforts and accomplishments, and liquidity. The IASB Framework does not separately consider business and nonbusiness enterprises, but instead provides one framework that applies to all entities.

B. SFAC No. 5 Recognition and Measurement in the Financial Statements Full set of Financial Statements o Statement of financial position (balance sheet) o Statement of earnings (income statement) o Statement of comprehensive income o Statement of cash flows o Statement of changes in owners equity Fundamental Recognition Criteria o Recognition is the process of formally recording or incorporating an item in the financial statements of an entity and classifying it as asset, liability, equity, revenue, or expense. Measurement Attributes for Assets and Liabilities o Historical cost o Current cost o Net realizable value o Current market value o Present value of future cash flows Fundamental Assumptions o Entity Assumption Economic activity can be accounted for when considering an identifiable set of activities (e.g., a separate corporation, division, etc.) o Going Concern Assumption Presumed that the entity will continue to operate in the foreseeable future. o Monetary Unit Assumption Money is an appropriate basis by which to measure economic activity. The monetary unit does not change over time; inflation is not reflected in the financial statements. o Periodicity Assumption Economic activity can be divided into meaningful time periods. o Historical Cost Principle Financial information is accounted for and based on cost, not current market value. o Revenue Recognition Principle Revenue should be recognized when it is earned and when it is realized or realizable. o Earned Entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. o Realized or Realizable Revenues and gains are recognized when products or other assets are exchanged for cash or claims to cash.

o Matching Principle All expenses incurred to generate a specific amount of revenue in a period are matched against that revenue. o Accrual Accounting Revenues are recognized when they are earned and expenses are recognized in the same period as the related revenue, not necessarily in the period in which the cash is received or expended by the company. o Full Disclosure Principle Information is given to the user that would make a difference in the decision process but not so much information that the user is impeded in analyzing what is important. o Conservatism Principle Selecting a GAAP method that is least likely to overstate assets and understate liabilities in the current period. Recognize revenues/gains when the earnings process is complete (or virtually completed). Recognize expenses/losses immediately. o The IASB Framework outlines only two fundamental assumptions: 1) accrual basis of accounting and 2) going concern. C. SFAC No. 6 Elements of Financial Statements Components of the financial statements that must be measurable and meet recognition requirements (CREG & LALEID). o Comprehensive Income Includes differences between beginning and ending equity other than transactions with owners (i.e., net income plus other comprehensive income). o Revenues Inflows, enhancements of assets, or reductions of liabilities from delivering goods or services as a part of normal operations. Recognize at gross amount (less allowances for returns and discounts given). o Expenses Outflows, uses of assets, or incurrence of liabilities from delivering goods or services as part of normal operations. o Gains Increases in equity from peripheral transactions and other events except revenue and investments from owners. o Losses Decreases in equity from peripheral transactions and other events except expenses and distributions to owners. o Assets Probable future economic benefits to be received by the company as a result of past transactions or events.

o Liabilities Probable future sacrifices of economic benefits arising from a present obligation of the company to transfer assets or provide services to other entities in the future as a result of past transactions or events. o Equity (of net assets) Residual interest in the assets of the company that remains after deducting its liabilities. o Investments by Owners Increases in assets from transfers of cash, property, or services from owners. o Distributions to Owners Decreases in assets from transfers of cash, property, or services, or the incurrence of a liability to owners. The IASB Framework outlines the following elements of financial statements (ALE IEC): o Assets o Liabilities o Equity o Income (including revenue and gains) o Expenses (including expenses and losses) o Capital Maintenance Adjustments Increases and decreases in equity that arise from the revaluation or restatement of assets and liabilities. o The IASB Framework does not include the concept of comprehensive income. D. SFAC No. 7 Using Cash Flow Information and Present Value in Accounting Measurements Framework for using future cash flows as a measurement basis for assets and liabilities. Five Elements of Present Value Measurement (UVOTE): o The price for bearing Uncertainty. o Expectations about timing Variations of future cash flows. o Other factors (e.g., liquidity issues, market imperfections). o Time value of money (the risk-free rate of interest). o Estimate of future cash flow. Fair Value Objective o If FV cannot be determined in the marketplace, the objective must be to obtain an estimate of fair value (i.e., present value of future cash flows). Present Value Computations o Traditional Approach One discount rate used to take the present value of future cash flows. Used when assets and liabilities have contractual (i.e., fixed) cash flows that are not expected to vary. Interest rate selection is paramount.

o Expected Cash Flow Approach Uses the risk-free rate of return as the discount rate and then turns its attentions to the expected future cash flows, considering uncertainties (e.g., default risk) as adjustments to the future cash flows. Considers a range of possible cash flows and assigns a (subjective) probability to each cash flow in the range to determine the weighted-average, or expected, future cash flow (e.g., warranty obligations). The IASB Framework does not consider the use of cash flow information and present value in accounting measurements.

E. SFAC No. 8, Chapter 1: The Objective of General Purpose Financial Reporting To provide financial information about the reporting entity that is useful to the primary users of general purpose financial reports in making decisions about providing resources to the reporting entity. Primary Users o Existing and potential investors, lenders, and other creditors. Financial Information Provided in General Purpose Financial Reports o Resources of the entity. o Claims against the entity. o How efficiently and effectively the entitys management and governing board have discharged their responsibilities to use the entitys resources. o Should be presented using accrual basis. o Primary users use financial information to assess the reporting entitys prospects for future net cash inflows and estimate the value of the reporting entity. F. SFAC No. 8, Chapter 3: Qualitative Characteristics of Useful Financial Information Characteristics that are likely to be most useful to primary users in making decisions about the reporting entity based on financial information. Fundamental Qualitative Characteristics. o Relevance Financial information is relevant if its capable of making a difference in the decisions made by users. I will be RELEVANT when I Pass My CPA Predictive Value o Can be used by users to predict future outcomes. Materiality o If an omission or misstatement of the information could affect the decisions made by users based on financial information. o Entity-specific aspect of relevance. o The FASB/IASB have not specified a uniform quantitative threshold for materiality and have not specified what would be material in specific situations. 8

Confirming Value o Provides feedback about evaluations previously made by users.

o Faithful Representation Financials are Not FAITHFULLY REPRESENTED unless Complete. Freedom From Error o There are no errors in the selection or application of the process used to produce reported financial information and that there are no errors or omissions in the descriptions of economic phenomena. o Does not require perfect accuracy (e.g., estimates). Neutrality o Free from bias in selection or presentation. Completeness o Includes all information necessary for the user to understand the reported economic phenomena, including descriptions and explanations. Steps to Apply the Fundamental Qualitative Characteristics o Identify phenomena that have the potential to be useful to primary users. o Identify the type of information about the phenomena that would be most RELEVANT. o Determine whether the information is available and can be FAITHFULLY REPRESENTED. o If information is available and can be faithfully represented, then fundamental qualitative characteristics have been satisfied. o If not, repeat process with the next most relevant type of information. Enhancing Qualitative Characteristics o Enhances usefulness of information that is relevant and faithfully represented. o Used to determine how a phenomena should be depicted if two ways are equally relevant and faithfully represented. o Enhancing qualitative characteristics should be maximized. o It is ENHANCING to CU on TV. Comparability o Enables users to identify similarities and differences among items. Understandability o Information is classified, characterized, and presented clearly and concisely. Timeliness o Information is available to users in time to be capable of influencing their decisions.

Verifiability o Different knowledgeable and independent observers can reach consensus that a particular depiction is faithfully represented. o Does not require complete agreement.

The Cost Constraint o A pervasive constraint on the information provided in financial reporting. o Benefits of reporting financial information must be greater than the costs of obtaining and presenting the information.

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