CONTENTS

GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
(GAAP) FORMATION
PURPOSE OF THIS SECTION...........................................................2
OBJECTIVES OF FINANCIAL REPORTING.........................................3
STANDARD SETTERS...................................................................... 4
Who Makes the Rules?............................................................................................. 4
American Institute of Certified Public Accountants..................................................5
The Securities and Exchange Commission..............................................................6
International and US Standards...............................................................................8

INTERNATIONAL FINANCIAL REPORTING STANDARDS..................10

GAAP FORMATION.......................................................................13
Recognition Criteria............................................................................................... 13
Characteristics of Accounting Information.............................................................14

LEARNING OBJECTIVES................................................................16
ACCOUNTING STANDARDS CODE................................................17
ACCOUNTING CONCEPTS STATEMENTS.......................................20

ET 1.5 h
GAAP
Generally
Accepted

GAAP Formation
2

WPasewark 2017

PURPOSE OF THIS SECTION

Determine how accounting rules are made.
THE RULES
Rules for accounting are called
Generally Accepted
Accounting Principles
(or GAAP for short).

GAAP Formation
3

WPasewark 2017

OBJECTIVES OF FINANCIAL
REPORTING
Generally
Accepted may
mean not codified,

Overall Objective: provide financial

information about the reporting entity that is
useful to existing and potential investors, lenders,
and other creditors in making decisions about
providing resources to the entity.
Includes:

Liabilit

Asse

Portray economic resources and claims to

resources.

Indicate financial performance reflected by

past cash flows
Concept Statement 8

GAAP Formation
4

Inco

WPasewark 2017

STANDARD SETTERS
Who Makes the Rules?

PAST:
Committee on Accounting Procedures (CAP)
issued Accounting Research Bulletins (ARBs) from
These
1939 to 1959.
did not
Accounting Principles Board (APB)
issued APB Opinions from 1959 to
1974.

NOW:
Securities and Exchange Commission (SEC)
government agency with legal power to create
GAAP; delegates to FASB
Financial Accounting Standards Board
independent organization with delegated
responsibility to create GAAP

FUTURE?:
International Accounting Standards Board develop a single set of global accounting standards

GAAP Formation
5

WPasewark 2017

STANDARD SETTERS

American Institute of Certified Public

Accountants
National professional
organization for CPAs.
IN THE PAST: The AICPA created committees to
form GAAP:

Committee on Accounting Procedures (CAP)

Accounting Principles Board (APB)

NOW: The AICPA funds the Accounting Standards

Executive Committee (AcSec) which issues:
Auditing and Accounting Guidelines
booklets summarizing auditing practices for certain
industries
Statements of Position (SOP) guidelines for
issues not yet addressed by the FASB
Practice Bulletins guidelines for issues not
likely to be addressed by the FASB

The AICPA also develops and grades the CPA exam.

Go to www.aicpa.org.

GAAP Formation
6

WPasewark 2017

STANDARD SETTERS
The old standard

The Securities and Exchange Commission

Governmental agency that

regulates:

issuance of securities, and

financial reporting of publiclytraded corporations

The SEC

Delegates the formation of GAAP to FASB

Intervenes in the formation of GAAP when

deemed necessary

Requires US GAAP for US companies traded on

US Exchanges

Allows international rules GAAP for non-US

companies

The official standard

GAAP Formation
7

WPasewark 2017

WWW.SEC.GOV

(Quite Possibly the Best Web Site of All Time)

GAAP Formation
8

WPasewark 2017

Go to: https://www.sec.gov/ and

https://www.sec.gov/edgar/searchedgar/webusers.htm

STANDARD SETTERS

International and US Standards

US
Standards
Promulga Financial
tor
Accounting
Standards
Board (FASB)
Headquar Norwalk, CT
ters
Members 7 members
Domain
United States
Approach Detailed, Rules
Based
www.fasb.org

GAAP Formation
9

International
Standards
International
Accounting
Standards Board
(IASB)
London
14 members
EU and over 80
other countries
Broad, Principles
Based
http://www.iasb.org.uk/

WPasewark 2017

STANDARD SETTERS
Example Differences

US
Standards
Mostly
historical

International
Standards
Historical or
fair value

Fixed
Asset
Value
Inventory LIFO permitted LIFO not
permitted
Major
Expense
Capitalize
Repairs
(overhaul
s)
Investme Equity method Equity method
nts
used
limited

INTERNATIONAL FINANCIAL
REPORTING STANDARDS

Standards for the 20 Largest Economies

Cod
e
AR
AU

Jurisdiction
Argentina
Australia

GAAP Formation
10

Require
d
for all

Require
d
for most

X
X

WPasewark 2017

Require
d
for
some

Permitte
d

IFRS not
permitte
d

BR
CA
CN
EU
FR
DE
IN

Brazil
Canada
China
European Union
France
Germany
India

ID
IT
JP
KR
MX
RU
SA
ZA
TR
UK
US

Indonesia
Italy
Japan
Korea
Mexico
Russia
Saudi Arabia
South Africa
Turkey
United Kingdom
United States

X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X

INTERNATIONAL FINANCIAL REPORTING

STANDARDS
GAAP Jurisdictions

R
an
k
1
2
3

Exchange
New York Stock
Exchange
NASDAQ
London Stock
Exchange Group

GAAP Formation
11

Economy
United
States
United
States
United
Kingdom
Italy

Marke
t Cap
(USD
bn)
New York 19,223
Headquarter
s

New York

6,831

London

6,187

WPasewark 2017

26,05

4
5
6

Japan Exchange
Group
Shanghai Stock
Exchange
Hong Kong Stock
Exchange
Euronext

7
Shenzhen Stock
Exchange
9 TMX Group
10 Deutsche Brse
8

https://en.wikipedia.org/wiki/List_of_st
ock_exchanges

GAAP Formation
12

Japan

Tokyo

China

Shangha
i
Hong
Hong
Kong
Kong
France
Amsterd
Netherlan am
ds
Belgium
Portugal
China
Shenzhe
n
Canada
Toronto
Germany Frankfurt
Jan 2015

WPasewark 2017

4,485
3,396
3,324
3,321

2,285
1,939
1,762

INTERNATIONAL FINANCIAL REPORTING

STANDARDS
QUESTIONS TO THINK ABOUT
Is it better to use
international or
national accounting
rules?

I wonder

Which are stricter, US

or international
accounting rules?
Which results in lower income, US or
international rules?
Which rules are harder to understand US or
international?

Should the US adopt international

standards?
Im not
sure what
we will be
doing yet.

GAAP Formation
13

WPasewark 2017

GAAP FORMATION
Recognition Criteria

Definitions considered an
element of financial
statements

Should it be
used in the
financial
statements?
Should there

Measurability relevant attribute

measurable with sufficient reliability.
Relevance capable of making a difference in
user decisions.
Reliability representationally faithful,
verifiable, and neutral.
Concept Statement 5

GAAP Formation
14

WPasewark 2017

GAAP FORMATION

Characteristics of Accounting Information

PERVASIVE CHARACTERISTIC
Decision Usefulness - benefits of the information
outweigh the cost.
QUALITATIVE CHARACTERISTICS
1. Relevance capable of making a difference in
a decision
predictive value used as an input to
processes employed by users to predict future
outcomes
confirmatory value provides feedback
(confirms or changes) about previous
evaluations
material omitting or misstating influences
decisions that users make
2. Reliability represents economic conditions or
events. Evidence:
complete - includes all information necessary
neutral without bias, primary concern
should not be the economic consequence.
free from error no errors or omissions

GAAP Formation
15

WPasewark 2017

GAAP Formation
16

WPasewark 2017

GAAP FORMATION

Characteristics of Accounting
Information
Enhancing Qualitative Characteristics
1. Comparability measured and reported in a similar
manner for different entities. Example: Delta
Airlines can be compared to United Airlines.

2. Consistency the same accounting treatment is

applied from period to period. Example: This years
financial statements can be compared to the last
years financial statements.

2016
2017

3. Verifiability different knowledgeable and

independent observers could reach consensus
4. Timeliness available to decision makers in time to
be capable of influencing their decisions.
5. Understandability Classifying, characterizing, and
presenting information clearly and concisely
Concept Statement 8

GAAP Formation
17

WPasewark 2017

LEARNING OBJECTIVES

At the end of this note section, you should be able

to:
THEORY

Identify the objective of financial accounting

Know the standard setting bodies for GAAP
Define the recognition criteria for GAAP
Identify the characteristics of accounting
information

What do I
need to
know for
the exam?

GAAP Formation
18

WPasewark 2017

Appendix 1

ACCOUNTING STANDARDS CODE

for US GAAP
AS
C
10
0
20
0

General
Topic
General
Principles
Presentation
of Financial
Statements

30
0

Assets

40
0

Liabilities

50

Equity

GAAP Formation
19

Sub Topic
105 GAAP Hierarchy
105 GAAP History
205 Presentation of Financial Statements
210 Balance Sheet
215 Statement of Shareholder Equity
220 Comprehensive Income
225 Income Statement
230 Statement of Cash Flows
235 Notes to Financial Statements
250 Changes and Errors
255 Changing Prices
260 Earnings Per Share
270 Interim Reporting
272 Limited Liability Entities
274 Personal Financial Statements
275 Risks and Uncertainties
280 Segment Reporting
305 Cash and Cash Equivalents
310 Receivables
320 InvestmentsDebt and Equity Securities
323 InvestmentsEquity Method and Joint
Ventures
325 InvestmentsOther
330 Inventory
340 Other Assets and Deferred Costs
350 IntangiblesGoodwill and Other
360 Property, Plant, and Equipment
405 Liabilities
410 Asset Retirement and Environmental
Obligations
420 Exit or Disposal Cost Obligations
430 Deferred Revenue
440 Commitments
450 Contingencies
460 Guarantees
470 Debt
480 Distinguishing Liabilities from Equity
505.20 Stock Dividends and Stock Splits

WPasewark 2017

AS
C
0

General
Topic

60
0

Revenue

70
0

Expenses

80
0

Broad
Transactions

90
0

Industries

GAAP Formation
20

Sub Topic
505.30 Treasury Stock
505.50 Equity Based Payments
505.60 Spinoffs and Reverse Spinoffs
605.15 Products
605.20 Services
605.35 Construction
605.40 Gains and Losses
705 Cost of Sales and Services
710 CompensationGeneral
712 CompensationPostemployment Benefits
715 CompensationRetirement Benefits
718 CompensationStock Compensation
720 Other Expenses
730 Research and Development
740 Income Taxes
805 Business Combinations
808 Collaborative Arrangements
810 Consolidation
815 Derivatives and Hedging
820 Fair Value Measurement
825 Financial Instruments
830 Foreign Currency Matters
835 Interest
840 Leases
845 Nonmonetary Transactions
850 Related Party Disclosures
852 Reorganizations
855 Subsequent Events
860 Transfers and Servicing
905 Agriculture
908 Airlines
91X Contractors
92X Entertainment
93X Extractive
94X Financial Services
958 Not-for-Profit
96X Pension Plans
97X Real Estate
985 Software

WPasewark 2017

FASB Code: Places all authoritative GAAP in an

organized source
Topic
Subtopic
Section
Paragrap
h
Code
105
2XX
3XX
4XX
505
605
7XX
8XX
9XX

XXX
XXX.XX
XXX.XX.XX
XXX.XX.XX.XX
Topic
General Principles
Presentation
Assets
Liabilities
Equity
Revenue
Expenses
Broad Transactions
Industry

Code
360.10
360.20

Subtopic
PP&E.Overall
PP&E.Real Estate

Code
360.10.00
360.10.05
360.10.15
360.10.20
360.10.21-49
360.10.50
360.10.55
360.10.SXX

GAAP Formation
21

Section
PP&E.Overall.Status
PP&E.Overall.Overview and Background
PP&E.Overall.Scope and Recognition
PP&E.Overall.Glossary
PP&E.Overall.XXX (Recognition, Guidance
issues)
PP&E.Overall.Disclosure
PP&E.Overall.Implementation Guidance and
Illustration
PP&E.Overall.Securities and Exchange Items

WPasewark 2017

Appendix 2

ACCOUNTING CONCEPTS
STATEMENTS
for US GAAP
Concepts Statements 1, 2 and 3 are superseded.
Concepts Statement No. 4
Objectives of Financial Reporting by Nonbusiness Organizations
(Issue Date 12/80)
Concepts Statement No. 5
Recognition and Measurement in Financial Statements of Business Enterprises
(Issue Date 12/84)
Concepts Statement No. 6
Elements of Financial Statementsa replacement of FASB Concepts Statement No.
3 (incorporating an amendment of FASB Concepts Statement No. 2)
(Issue Date 12/85)
Concepts Statement No. 7
Using Cash Flow Information and Present Value in Accounting Measurements
(Issue Date 2/00)
Concepts Statement No. 8
Conceptual Framework for Financial ReportingChapter 1, The Objective of General
Purpose Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful
Financial Information (a replacement of FASB Concepts Statements No. 1 and No. 2)
(Issue Date 9/10)

GAAP Formation
22

WPasewark 2017