Exam 2 . Section I . Chapter 1 Influences, Concepts of Financial Reporting and Standards-Setting

AGA Montgomery Chapter CGFM Exam ReviewPresented By

Steven H. Emerson, CPA, CGFM, CGAP, CFE, CITP, CGMA

Exam 2 . Section I . Chapter 1

Influences, Concepts of Financial Reporting and

Standards-Setting

“Government ought to be run like a business!”Governments DO NOT run like a business

Do not operate in the same environmentDo not have the same goals and objectivesDo not rely on the same resources

The U.S. Constitution provides two levels of governmentFederal

The federal government has primary authority for national and international affairs, as set forth in the U.S. Constitution

The federal government can also impose certain requirements on the management of state governments, provided the authority is granted in the U.S. Constitution

StatesAll other powers not set forth in the U.S. Constitution are left to the

states

Governmental Environment

State ConstitutionsEach state has one which sets forth the manner in

which the state will functionNo two are alikeThere are some common requirements for each

state constitutionSets forth the manner by which the executive branch

will function and establishes the offices, terms and requirements for holding office

Sets the requirements for the legislative branch, detailing how laws are to be introduced and enacted

Sets forth the manner by which local governmental entities can be formed

Governmental Environment - continued

All These Entities Are subject to specific legal requirements for

Organization Structure Ability to levy taxes Ability to raise other revenues The types of services to be provided The sovereign powers that can be exercised

Federal and State Laws Set forth the manner by which private sector corporations can be

organized Do not go into details

As to what offices are required What functions they can perform How they go about making money

This is left to the board of directors of the corporations


Goals and ObjectivesGovernment entities differ considerably from

those in the private sectorGovernments

Formed without a profit motiveExist to provide servicesGoals and objectives are established with input from

the public To ensure that the services are consistent with the needs of

constituentsMany have gone through a formal process of

establishing a mission or vision statement With input from every sector of the community


Government ResourcesDerived primarily from taxes

No shareholdersNo ability to match taxes provided by a

constituent to the services received by that constituentIn many instances, services are provided to

constituents who pay little for no taxesInvoluntary resource providers pay the taxes

Must establish priorities for the services the government providesConstant pressure to limit taxes as much as

possible


Government Resources - continuedReceive revenue through grants and revenues

from other levels of governmentEstablish the following to recover some or all

of the cost of providing servicesUser feesLicensesPermits


Government Resources - continuedContrast with the private sector

Private sector raises revenue through exchange transactionsA customer pays money and receives a good or service

The private entity will stay in business as long as the private entity keeps its customers happy

If it does not, it loses its customers and must either improve its business practices or cease operations

A private entity cannot raise taxes or force its customers to pay

It can ask its shareholders to provide additional resources through the purchase of stockHowever, more than likely, existing shareholders would want to

sell their shares rather than buy new shares


Government Resources - continuedContrast with the private sector - continued

Even not-for-profit organizations need to satisfy customers to stay in business

Many charge a membership fee or rely on voluntary contributions

If they do not keep their customers or members satisfied, they will no longer be able to continue serving their constituents

Measures for success Private sector measures include increasing market share,

earnings per share and staying in business Governments have no single measure for success

A cynic might say that one measure of success is the re-election of public officials



Governments provide services that are intended to enhance the quality of life of its constituentsPolice protectionFire suppressionStreet maintenance and repairPublic healthRecreational activitiesRefuse collectionStreet cleaningCurb and gutter repairsSidewalksMail delivery



Governments also provide law enforcementLaws are passed to protect the public against wrongdoingIndividuals who break the law are subject to trial and

perhaps incarcerationGovernments maintain facilities for trials and incarcerations

BudgetsSince the majority of funding to most governments comes

from taxes, governments must establish a method for allocating the money

Commercial entities use budgets as a benchmark for performance, goals for growth and as a management tool for planning



Budgets – continuedGovernments are legally bound by the budget

The budget establishes Spending authorizations Outlines programs and services to be provided Defines the sources of revenues that will be used to fund the programs

and services The budget may specify restrictions on the use of resources

The budget process is the primary control device in government

Adherence to the budget is one way government financial managers demonstrate accountability

The budget is a guide to operations in the private sector



Governments must provide reports that demonstrate complianceSince a government organization is grounded in laws,

rules and regulationsSince resources are derived from involuntary providersSince service priorities are established through a

legislative systemFinancial reports

Is a primary mechanism by which public officials are able to demonstrate accountability

Show how much money was raised, how it was spent and whether the spending was in compliance with the budget



Financial reports – continued Associated performance reports inform users about how well a

government is operating and whether it is achieving its goals in an effective and efficient manner

Stockholders, investors and creditors of a commercial entity are interested in the profit to be generated by the commercial entity

Taxpayers, investors, service recipients and creditors of a government are interested in the delivery of services and the ability to meet future obligations

The government financial management system must provide the accounting and reporting that addresses these unique operating requirements


AccountabilityThe cornerstone of financial reportingPublic officials have to be accountable to the

citizensTo justify the raising of public resourcesTo justify the purposes for which they are used

Government accountability is based on:The belief that the public has a right to knowThe ultimate power belongs to the people

People can exercise this power Through the ballot box Through initiatives and referendums

Accountability

Accountability - continuedFinancial reporting

Plays a major role in fulfilling government’s duty to be accountableDemonstrating accountability includes providing information

to assist in evaluating whether the government operated within the legal constraints that have been imposed

Governments derive their revenues mostly from taxpayersStatutory authority imposition, not the payer’s willingness to

participate in the following transactions Tax assessments Licenses Fees Permits User fees

Accountability - continued

Accountability - continuedGovernments derive their revenues mostly from

taxpayers - continuedThe public has no choice but to pay the fee or forgo the

serviceThe authority is vested in the governmental entity

To protect the public welfareTo promote social and economic development

Governments must account for the raising and using of resources

Taxpayers and citizensRepresented by their elected officialsDo not have a direct voice in the allocation of resources

These representatives are accountable to the citizenry


Accountability - continuedLegal accountability

The need to comply with various laws, rules and regulations Public officials are accountable for the establishment of

processes The controls that are in place to ensure that transactions are processed

properly That payrolls are calculated accurately That the payment for goods and services are properly authorized That services are provided only to eligible recipients

Performance accountabilityEnsuring that governments act in an efficient or economic

mannerMany public officials are accountable for the results of

programs Ensuring that goals and objectives are met


Accountability - continuedFiscal accountability

Associated with the raising of resources and the allocation of those resources to accomplish objectives

Public officials often use their power to impose taxes on their citizens

Public officials use these resourcesTo provide goods and servicesTo provide public protectionTo enhance the quality of life

Officials are accountable for the resources raised and how they are used

Financial reporting is an important method of demonstrating fiscal accountability


Accountability - continuedOperational accountability

Associated with the stewardship of public resources

Not only do public officials raise resources, they must ensure that the resources are used appropriately

Performance measures and performance reportingAre used to address operational accountability

Since governments do not have a profit motive and there needs to be a way to determine if resources are being used wisely


Accountability - continuedExecutive branch

Is accountable to the legislative branch and the public Is accountable to the public for operating in an effective and

efficient manner and for collecting and using resources Is accountable to the legislative branch for using resources in

accordance with legislative mandates within the fiscal constraints imposed by the legislative branch

Is accountable to other governments using resources in accordance with grant requirements and restrictions

Legislative branchIs accountable to the public for the raising of resources and for

determining how those resources are to be usedBoth the executive and legislative branch rely on financial

reporting as a means of demonstrating accountability


Many believe that the current generation of citizens should not be able to shift the burden for paying for current-year services to future-year taxpayers

Assessing whether the government’s financial position improved or deteriorated over the period is important not only because it has financial implications, but also because it has social and political implications

The analysis of why the financial position improved or deteriorated helps to explain whether current-year taxpayers passed on financial burdens to future-year taxpayers without related benefits

Interperiod Equity

Interperiod or intergenerational equityA significant part of accountabilityFundamental to public administrationSome feel that it is generally enforced with balanced

budget laws, which mandate that current-year services must be financed with current-year revenuesUnfortunately the definition of what constitutes current-

year revenues often allows governments to borrow either short-term or long-term funds to finance current services

Most governments budget on a cash basis or a near cash basisThis allows the possibility for manipulation of the ending

balances to give the appearance of “break even” by simply not paying bills when they come due

Interperiod Equity - continued

Interperiod or intergenerational equity - continuedLaws and regulations are usually specific in terms of

borrowingi.e. some laws prohibit borrowing for operating purposes or

limit borrowing only to meet cash flow needsOther laws require borrowing to match the useful lives of

assets that are being acquired or constructedHowever, imaginative financing techniques may undercut

the application of these laws and regulationsInterperiod equity therefore needs to be considered

when establishing financial reporting objectives

Interperiod Equity - continued

Interperiod Equity - continuedInterperiod or intergenerational equity -

continuedFinancial reporting should help users assess

whether current-year revenues were sufficient to pay for the services provided that year and whether future taxpayers will be required to assume a burden for services previously provided

Current financial reporting principles are intended to highlight the government’s efforts to achieve interperiod equityThis concept may be one of the most important issues

in government financial reporting

Governments have a wide range of users of their financial reportsLegislatorsOther oversight agenciesCitizens InvestorsCreditorsMediaFinancial managersProgram managers

This group represents a much broader range of users than is represented by users of commercial financial statements

Users and Uses

Users and Uses - continuedLegislators

Charged with forming the priorities for delivery of services by the governmental entity

They will look to the financial statements for information about:Available resourcesOperating resultsCompliance with laws and regulations

They will often focus on a particular component of the government, but they also pay attention to the government as a whole

Since they establish the budget appropriations, they use the financial reports to see if actual expenditures were within the authorized levels

Users and Uses - continuedCitizens and taxpayers

Concentrate of the government’s accountability for the management of public tax dollars

They are concerned with operating resultsi.e. Is a surplus being generated?i.e. Are monies being spent on the services in which I am

interested or are the services being cut?i.e. Are assets being safeguarded?i.e. Are the services being delivered efficiently?

Public interest groups will be interested in particular programs, but every citizen may have a different issue that triggers his or her concern

Many are interested in information about taxes and other revenue-raising efforts

Investors and creditorsUse financial reports to determine compliance with

contractual agreements related to debt issuesUsually they are sophisticated and will be evaluating the

government’s financial position with complex analytical toolsThey use these tools to assure monies are being treated in a

manner consistent with the government’s commitmentsPotential investors and creditors will use the tools to

determine if they wish to purchase government debt instruments

The long-range view of the government as a whole and its ability to service current and future debt is more important than the short-range view of a particular program

Users and Uses - continued

Users and Uses - continuedMedia

Most governments are subject to specific requirements for publishing financial information through the media or for responding to media inquiries for information

Serves an important role by publicizing requests for public input on developing priorities for the government’s operations

Financial reports play a key role in this two-way communication

Financial and program managersGovernment reports are also vital to these users, who focus on

the day-to-day operations and delivery of servicesAlso review compliance issues to ensure that the government

is operating within:Budgetary parametersRestrictions of laws and regulationsPublic policy

Some will be interested only in a particular program while others must evaluate the financial position of the entire government

Employee and employee organizationsAre interested in the status of a government, particularly with

respect to funds available for future benefits and collective bargaining

Users and Uses - continued

Needs for ReportingAssess accountability

Governmental financial reporting is the primary communication device for assessing accountability

Financial reportsPublic officials are responsible for raising resources

and for determining how those resources are to be used

Provide the means to determine if the resources that were raised were sufficient to cover the services provided during the operating period

Should allow users to determine if taxpayers of the future are required to pay for services provided in the current year

Needs for Reporting - continuedAssess accountability - continued

BudgetOn of the primary responsibilities of public officials involves the

enactment of the budgetNumerous issues arise during the process involving the

allocation of resourcesThe budget process normally includes a series of public

hearings that generate input from the citizenry within the jurisdiction

The legislative branch will incorporate this input as it establishes priorities and defines services that will be provided by the budgetary appropriations

Financial reports give the citizenry a report card on how well the administration performed with respect to the raising of resources and spending in accordance with appropriations and other legal requirements made by the legislative body

Needs for Reporting - continuedAssess accountability - continued

Public officials are also accountable for ensuring that resources are used in an effective and efficient manner

The resources are used to carry out programs of the government

Financial reports of those programs must communicate how well the recipients of those services performed

If intergovernmental revenues are involved, grantors will rely on the reportsTo compile consolidated program reportsTo valuate the effectiveness of resource allocationsTo monitor compliance with grant restrictions

Needs for Reporting - continued Assess accountability - continued

Managers of programs Use financial reports as tools for planning and administration Can determine if the programs are operating in an effective and efficient

manner Legislators, citizens and investors/creditors

Review the reports to evaluate the cost of services Evaluate the level of governmental support necessary to maintain services

Financial reports alone are not sufficient to determine whether programs are operating effectively and efficiently

Many governments supplement financial reports with programmatic information and performance measures

This information is often non-financial in nature Users are able to see what was accomplished with the resources that were

provided Are better able to determine if resources are used effectively and efficiently

More governments are beginning to supplement financial information with performance information

Needs for Reporting - continuedMaking economic, social and political decisions

Financial reports should provide information as to the types of financial resources that were raised and how they were usedWere the inflows sufficient to meet the required

outflows?If not, what actions were taken?Was the government able to pay its bills on time?Was there sufficient cash to meet operating

requirements?Financial reporting provides information that

allows users to assess how well the government performed

Needs for Reporting - continuedMaking economic, social and political

decisions - continuedFinancial reporting should provide information

about the results of operationsIs the government better or worse off as a result of

operations?Often, a government makes a decision to use

resources accumulated from past operationsIn this instance, it planned to utilize those

resources and provided this information in financial reports

Needs for Reporting - continuedMaking economic, social and political decisions - continued

On the other hand, the government may have financial difficulty due to a downturn in the economy How did the government address the problem? Were resources available from reserves? Did programs have to be cut? Were additional revenues raised?

Financial reporting also provides users with information as to the financial condition and results of operation of the government What are the government’s assets? How much does the government owe? Are there long-term receivables and obligations that may impact future

services? Governments are responsible for enhancing the quality of life of

their constituents What is the condition of the government’s infrastructure? Is maintenance being performed in a timely fashion?

Reporting in GovernmentTypes of reports

Two types of reportsPoint-in-time reports (stock reports)

Provides current information as of the date of the report i.e. Balance sheet

Period reports (flow reports)Covers the entire fiscal year

i.e. Operating statement i.e. Cash flow statement

General purpose external financial reports (GPEFR)Consists primarily of the audited financial statements,

including the notes to the financial statements along with required supplemental information

Reporting in Government - continued

Types of reports - continuedOther financial reports include:

BudgetBudget comparison reportsReports that disclose specific aspects of the

government’s condition or operations (special purpose financial reports)Reports on cashReports on receivables outstanding or revenues generatedOffering statements (for governments issuing debt)Project reportsReports to grantor agenciesReports to bondholders and oversight bodiesPopular reports


Types of reports - continuedAnother group of reports that convey more

than just financial informationService efforts and accomplishments reports (SEA)Economy and efficiency reportsReports on costs of operations, programs, etc.

Reporting characteristicsInformation in financial reports must have the

following characteristics to be effective as the means by which governments communicate financial information to users


Reporting characteristics - continuedInformation in financial reports must have the

following characteristics to be effective as the means by which governments communicate financial information to users – continuedUnderstandability

It should be expressed as simply as possibleThe reports should include explanations and

interpretations to help users understand the information provided

Financial reports do not have to be understandable to all users

Users of audited financial statements should have a working knowledge of government accounting


Reporting characteristics - continued Information in financial reports must have the

following characteristics to be effective as the means by which governments communicate financial information to users – continuedReliability

It should be verifiable, free from bias and faithfully represent what it purports to represent

To be reliable, it needs to be comprehensive Nothing material should be omitted

Relevance This characteristic encompasses many of the others

i.e. If information is not timely or reliable, it is not relevant Information is relevant if it is capable or making a difference in a

user’s assessment of a condition, event or problem


Reporting characteristics - continued Information in financial reports must have the following characteristics to

be effective as the means by which governments communicate financial information to users – continued

Timeliness Information should be reported in a time frame that enables users upon which to base

decisions To be timely, precision or detail might have to be sacrificed A timely estimate is more useful than a precise amount, if the time to produce the

precise amount is overly long Consistency

Once a particular accounting principle or method is used, it is presumed that future information is reported using the same method or principle

If it is necessary to change a method or principle, the nature and reason for the change should be disclosed as well as the effect of the change

Comparability Financial reports should be comparable

Like entities should report the same information the same way It does not imply that there cannot be differences among governmental entities The differences should be due to substantive differences in the underlying transactions

or the governmental structure


Reporting characteristics – continuedEven if the basic characteristics are followed,

financial reports have their limitationsIt may be necessary to report information

based on approximate measures of past eventsIf the information is not readily availableIf firm data does not existIf it is costly to produce

Information is often based on judgments and estimates because of the application of rules or conventions


Reporting characteristics – continued Financial reports are only one source of information that may be

needed by users To make decisions, it may be necessary to utilize several sources

and combine the information i.e. The budget document may contain information at levels of detail not

found in audited financial statements Project and performance reports are also useful sources of

information Financial reports often do not provide non-financial information

regarding the performance of government entities Users not only need information about how much money was

spent They also need information as to what was accomplished This type of information, although not as readily available,

requires more than reports of solely financial amounts

Need for Reporting StandardsCompanies in the private sector must provide

financial reportsWithout financial reporting, how does one know if

he/she wishes to invest in a company?Without reporting requirements, how can one

evaluate and compare companies?A major contributing factor to the collapse of the

stock market in 1929 was the lack of reporting requirements

Companies would make exaggerated claims about their profitability to induce the public to purchase securities

Need for Reporting Standards - continued

In order to protect the public, the Securities and Exchange Commission (SEC) was established in 1934 and vested with the power to regulate securities markets

The establishment of the SEC was based on the belief that investors should have access to information about a potential investment before buying it

The SEC requires companies to disclose certain informationThe SEC does not promulgate accounting and reporting

standardsThe SEC granted that authority to a series of professionally

sponsored standard-setters Financial Accounting Foundation (FAF)

Financial Accounting Standards Board (FASB) Vested with the authority to establish accounting and reporting standards for

the private sector companies


The SEC has no direct authority over governmental entitiesStatesCountiesCitiesSchools districtsEtc.

Government entities are sovereignHow does a potential investor in government securities

obtain financial information about a city that is going to issue bonds?

For many years, there was a presumption that the public did not need protection with regard to government securitiesAfter all, a city was not going to go out of business


The FASB believed that it had no jurisdiction for the establishment of accounting and reporting standards for governments

Some government operations such as hospitals, colleges and universities, utilities and pensions chose to use FASB accounting and reporting standards since they were comparable to private sector entities

Most state and local governments had statutes and charter provisions regarding accounting, reporting and budgeting

These provisions generally were geared toward budgetary compliance


Recommended accounting and reporting standards for state and local governments began in 1934

These standards were recommended by the National Committee on Municipal Accounting, a consortium of public interest organizations led by the Municipal Finance Office Association (MFOA)

This group was active until 1941, and issued a number of bulletins advocating certain accounting and reporting principles

In 1948, the National Council on Governmental Accounting (NCGA) was established by a number of public interest groups, led by the MFOA, which later became the Government Finance Officers Association (GFOA), to continue the work that had been started in 1934


In 1968, the NCGA issued the Governmental Accounting, Auditing and Financial Reporting (GAAFR), commonly known as the Blue Book

This book consolidated the principles and standards previously issued

It also indicated that the requirements of a particular state or local government would assume primacy over the principles in GAAFR

There was no uniformity in the accounting standards and principles used by the state and local governments


In the 1970s a number of financial crises highlighted the lack of accounting, reporting and auditing standards for governments New York City Cleveland, OH

In 1974, the American Institute of Certified Public Accountants (AICPA) issued an audit guide Audits of State and Local Government Units (ASLGU) which recognized for the most part the principles of GAAFR

These principles, not the requirements of each individual state or local government, were to be considered the accepted principles for the state and local government accounting and auditing community

Conflicts between GAAFR and ASLGU were reconciled in the 1980 version of GAAFR


Even with all the improvements that were taking place in government accounting and reporting, no authoritative body was vested with the establishment of standards

State and local governments, like the federal government, are sovereign entities

Governments that elected to follow GAAFR did so because they wanted to, not because they had to

It became clear that standards for accounting and reporting by state and local governments were needed

The FAF established an organizing committee to recommend a structure should the FASB’s authority be expanded to include state and local governments or should a new board be created?

The committee recommended the establishment of a new board, and in 1984. the Governmental Accounting Standards Board (GASB) was created


State and local governments, as sovereign entities, do not have to comply with the standards issued by the GASB

Many willingly complied with the reporting requirementsExternal pressures were also brought to bear to encourage

them to accept GASB’s standardsMost large governments are active in the securities marketsThey need cash to finance public works projects

RoadsSewersBridgesWaterlinesBuild public facilitiesPurchase land and equipment


The major bond rating agencies wanted governments to provide audited financial statements prepared in accordance with the accounting standards issued by the GASB for the purpose of evaluating the issue

The rating agencies stated that failing to provide audited information could have a negative impact on an issue through additional interest costs

As a result, many governments began to comply with GASB standards Many state governments also believed that recognizing GASB’s

authority to set standards was good public policy As a result, they enacted legislation accepting, and often requiring,

GASB’s standards for accounting and reporting by local government entities within the state

A number of local governments also enacted charter and ordinance provisions requiring financial statements to follow generally accepted accounting principles


The pressures regarding the issuance of securities by state and local governments do not exist in the federal government

Investors were willing to purchase federal securities regardless of the government’s financial condition or the availability of information

Moreover, since there is only one federal government, there is no need to evaluate and compare offerings

The need for better financial information about federal spending became evident, particularly as deficits mounted


Most accounting and reporting in the federal government involved budgetary information, for which there were and are extensive reporting requirements and standards

Since the budget is primarily on a cash basis, no information was available about the status of non-cash resources and obligations, the cost of services or the future impact of decisions made today

In 1990, the Director of the Office of Management and Budget, the Secretary of the Treasury and the Comptroller General, who heads the Government Accountability Office, signed a Memorandum of Understanding establishing the Federal Accounting Standards Advisory Board (FASAB)

Standards-SettingThree organizations have been vested with the

authority to set accounting and reporting standardsFinancial Accounting Standards Board (FASB)

The standards setter for entities in the private sector, including not-for-profit entities

Some state and local entities can follow FASBGovernmental Accounting Standards Board (GASB)

In certain instances, the GASB has stated that a particular FASB standard will apply to state and local entities

Federal Accounting Standards Advisory Board (FASAB)The standards setter for the federal government

Standards-Setting - continuedEach board tries to be objective and neutral

in its decision-making and tries to ensure, as much as possible, that the information resulting from its standards is a faithful representation of the effects of activities of the appropriate entities

Objective and neutral means free from bias, precluding the appropriate standards-setting body from placing any particular interest above the interests of the many who rely on the information contained in financial reports

Standards-Setting - continuedEach board weighs carefully the views of its

constituents in developing concepts and standards so that they will meet the accountability and decision-making needs of the users of financial reports and gain general acceptance among preparers and auditors of financial reports

Standards are only established when the expected benefits exceed the expected costs

Each board strives to determine that proposed standards, including disclosure requirements, fill a significant need and that the costs they impose, compared with possible alternatives, are justified when compared to the overall public benefit

Standards-Setting - continuedEach board attempts to bring about needed changes

in ways that minimize disruption of the accounting and financial reporting processes

Reasonable effective dates and transition provisions are established when new standards are introduced

Each considers it desirable that change be evolutionary to the extent that can be accommodated by the need for understandability, reliability, comparability and consistency

Each reviews the effects of past decisions and interprets, amends or replaces standards when appropriate

Standards-Setting - continued Each board is committed to following an open, orderly process to set

standards Each uses several communication tools to keep constituents informed

of important developments in its operations and activities These “due process” procedures, described below, are designed to

permit a timely, thorough and open study of accounting and financial reporting issues

The procedures also encourage broad participation in the accounting and standards setting process and communication of all points of view and expressions of opinion at all stages of the process

The ability to demonstrate that comments received in due process are considered carefully enhances the general acceptance of the board’s conclusions

Not all accounting issues are set forth in the standards A hierarchy has been established to provide guidance to preparers and

attesters regarding accounting issues

Due ProcessThe time and location of board meetings are publicly

announced well in advance of the meetingsThe meetings are open to the publicVarious documents may be used to enable due process to be

followed for a project prior to the issuance of a final standardDiscussion memorandum (DM)

Outlines the results of research efforts of staff and defines the accounting and reporting issues for a particular project

Respondents are asked to comment on each aspect of the issue At this point, a board has no particular direction or view on the

issue The board is soliciting opinions from constituents It is very rare for a board to issue a discussion memorandum

since most accounting issues do not require extensive research

Due Process - continuedInvitation to comment (ITC)

Staff document It may contain the elements of a DM, a PV document

or bothRespondents may be asked to comment on a research

report, a monograph, a standard or a proposed standard issued by another standard setting body

Preliminary views (PV)A board’s initial proposal for an accounting and

reporting standardThere may be a single view upon which a board is

seeking input or there may be a majority and minority view

Due Process - continuedExposure draft (ED)

The last due process document published before the final standard is issued

The ED is in the format of the final standard, but constituents have an opportunity to react and provide comments

It is quite common for boards to issue only an exposure draft for comment

For each of these documents, persons interested in the matter can submit written comments to the board

Due Process - continuedA board may also schedule public hearings in

conjunction with the issuance of any of the documents

At the public hearing, respondents have the opportunity to orally present their opinions

A board also has the opportunity to question the respondents regarding their views

A board may establish a task force, consisting of individual knowledgeable on a particular subject, to assist in developing any of the above documents and/or reviewing and commenting on proposed positions

Due Process - continuedThe final document issued by a board is a “statement”The statement sets forth the accounting and reporting

standard that should be followed by preparers and auditors of financial statements, along with the date when the statement becomes effective

The due process documents published for a particular project depend on the scope of the project

For some projects, a board may decide that only an ED is required

For other projects, a DM might be followed by an EDA board may also decide to re-issue a document if

comments merit significant revisions to previous board proposals

Due Process - continuedIn addition to issuing statements on accounting and

reporting standards, boards issue “concept statements (CS)”

A CS does not establish accounting or reporting standardsIt describes the concepts the board will use as a

framework for evaluating existing standards and practices and for establishing future standards

Boards may issue “interpretations” or “technical bulletins” to clarify points that may be ambiguous in a previous standard

Technical bulletins are also used to address issues that do not warrant the research involved in establishing a new standard

Questions?

Steven H. Emerson, CPA, CGFM, CGAP, CFE, CITP, CGMA

P.O. Box 834Helena, AL 35080

(205) 807-4466(205) 449-8666 (Fax)[email protected]

mailto:[email protected]

http://www.shecpa.com/

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Exam 2 . Section I . Chapter 1 Influences, Concepts of Financial Reporting and Standards-Setting

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