Financial Statements - Financial Reporting Objectives and Enforcement

I. Financial Reporting Objectives

There are six steps in completing the financial analysis framework:

1. The first step is to determine the scope and purpose of the analysis. When stating the objective and context, definitive goals should be stated as well as what form the analysis will take and what resources will be required to complete it.
2. In order to complete the analysis the analyst must gather data. In addition to the financial data, a physical inspection should be completed and company stakeholders should be interviewed, if applicable.
3. Analysts must then process the data and make adjustments to the financial statements, to assumptions or estimates, and any other necessary calculations.
4. Once the data has been reviewed and updated then the analyst must analyze and interpret it to determine if the analysis achieves the original goals that were set in the first step.
5. Once the analysis has been completed then the analyst must report the conclusions or recommendations and communicate it to the appropriate audience.
6. Since the factors and assumptions made in the analysis are subject to change over time, the analyst should update the analysis periodically, to see if the conclusions or recommendations change.

Objectives of Financial Reporting
Objectives of financial reporting identified in SFAC 1 are to do the following:

  • They are to provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions. (Note the FASB's emphasis on investors and creditors as primary users. However, this does not exclude other interested parties.)
  • They are to provide information to help present and potential investors and creditors and other users in assessing 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. (Emphasize the difference between the cash basis and the accrual basis of accounting.)
  • They are to provide information about the economic resources of an enterprise, the claims on those resources and the effects of transactions, events and circumstances that change its resources and claims to those resources.

The main barrier to convergence or one universally accepted set of financial standards is the fact that the international boards that set standards cannot agree on the best way to deal with particular issues or situations affecting the preparation of financial statements. Different local issues often take priority over determining ways to deal with international accounting problems. The political environment and the resultant political pressure on governmental standards authorities also create an impediment to a global standards framework.

The major standard setting authorities such as the International Accounting Standards Board and the U.S. Financial Accounting Standards Board, the International Organization of Securities Commissions, the U.K. Financial Services Authority, and the U.S. Securities and Exchange Commission all have their own projects to solve domestic financial accounting and performance reporting issues. However, international convergence has become a greater priority as more foreign companies become available for investment

II. Enforcing and Developing U.S. GAAP

FASB Role in Enforcing and Developing U.S. GAAP
The Financial Accounting Standards Board (FASB) is a nongovernmental body. This board sets the accounting standards for all companies that issue audited U.S. GAAP-compliant financial statements.

Both the Securities Exchange Commission (SEC) and American Institute of Certified Public Accountants (AICPA) recognize that the Statement of Financial Accounting Standards (SFAS) statements as authoritative.

GAAP comprises a set of principles that are patterned over a number of sources including the FASB, the Accounting Principles Board (APB) and the AICPA research bulletins.

Prior to the creation of the FASB, the Accounting Principles Board (APB) set the accounting standards. As a result some of these standards are still in use.

SEC Role in Enforcing and Developing U.S. GAAP
The form and content of the financial statements of public companies are governed by the SEC. Even though the SEC delegates most of the authority to the FASB, it frequently adds its own requirements, such as the requirement for a company to provide a management discussion and analysis with its financial statements, quarterly financial statements (10-Q) and current reports (8-K). These discussions indicate things like changes in control, acquisition and divestitures, etc.)

Accounting Pronouncements Considered Authoritative
Accounting pronouncements are segmented into four categories. Category A is the most authoritative, and Category D is the least authoritative:

Category (A)
- FASB Standards and Interpretations
- APB Opinions and Interpretations
- CAP Accounting Research Bulletins

Category (B)
- AICPA Accounting and Audit Guides
- AICPA Statements of Position
- FASB Technical Bulletins

Category (C)
- FASB Emerging Issues Task Force
- AICPA AcSEC Practice Bulletins

Category (D)
- AICPA Issues Papers
- FASB Concepts Statements
- Other authoritative pronouncements

Accounting Qualities


Related Articles
  1. Forex Education

    Accounting Basics: Financial Reporting

    By Bob Schneider Generally Accepted Accounting Principles (GAAP)A key prerequisite for meaningful financial statements is that they be comparable to those for other companies, especially firms ...
  2. Fundamental Analysis

    Why Financial Statements Are Harder to Read Than Ever Before

    Understand four major reasons that financial statements published in 2016 are more complicated and difficult to read than they were in the past.
  3. Forex Education

    Accounting Basics: Branches Of Accounting

    By Bob Schneider Accounting can be divided into several areas of activity. These can certainly overlap and they are often closely intertwined. But it's still useful to distinguish them, not ...
  4. Professionals

    Financial Accounting

    Financial accounting is the process of gathering, recording, summarizing and reporting financial data relating to a business. The ultimate goal is to accurately report the financial picture and ...
  5. Investing Basics

    What are Financial Statements?

    Financial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
  6. Professionals

    Financial History: The Rise Of Modern Accounting

    Find out how these two have grown hand-in-hand throughout our modern history.
  7. Economics

    What are Accounting Principles?

    The term accounting principles refers to rules and guidelines companies use to help them record their business and financial transactions.
  8. Economics

    International Financial Reporting Standards (IFRS)

    International Financial Reporting Standards are accounting rules and guidelines governing the reporting of different types of accounting transactions.
  9. Investing Basics

    12 Things You Need To Know About Financial Statements

    Discover how to keep score of companies to increase your chances of choosing a winner.
  10. Investing Basics

    Explaining Financial Statement Analysis

    Financial statement analysis is the process of reviewing a company’s statements to gain an understanding of its financial health.
RELATED TERMS
  1. Financial Accounting Standards ...

    A seven-member independent board consisting of accounting professionals ...
  2. Accounting Changes And Error Correction

    Requirements for the accounting for and reporting of a change ...
  3. Accounting Principles Board - APB

    The prior authoritative body of the American Institute of Certified ...
  4. Accounting Interpretation

    A statement clarifying how accounting standards should be applied. ...
  5. Hierarchy Of GAAP

    An outline for determining the most appropriate sources for obtaining ...
  6. Statement of Financial Accounting ...

    A formal document issued by the Financial Accounting Standards ...
RELATED FAQS
  1. How does the Financial Accounting Standards Board (FASB) establish accounting protocol?

    Find out how the Financial Accounting Standards Board or FASB, identifies possible financial reporting issues and determines ... Read Answer >>
  2. When and why were GAAP first established?

    Take a deeper look into the development and purpose of the generally accepted accounting principles, also known as GAAP, ... Read Answer >>
  3. What are the objectives of financial accounting?

    Learn about the principle objectives of financial accounting, including the furnishing of the financial statements for those ... Read Answer >>
  4. Who enforces GAAP?

    Take a deeper look at the private enforcement mechanisms behind the generally accepted accounting principles for American ... Read Answer >>
  5. What are some good online resources for me to learn about Generally Accepted Accounting ...

    Learn about three authoritative online resources for generally accepted accounting principles, or GAAP: the websites for ... Read Answer >>
  6. How do investors and lenders benefit from financial accounting?

    Read about the benefits of financial accounting, including access to information and transparency between companies and their ... Read Answer >>
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center