Chapter-02

Institutional Setting and Development

of Financial Reporting Systems

1. American Institute of Certified Public Accountants

(AICPA)
The American Institute of Certified Public Accountants (AICPA) is the national,
professional association of Certified Public Accountants (CPAs) in the United States,
with more than 360,000 members, including CPAs in business and industry, public
practice, government, and education; student affiliates; and international associates.
The AICPA maintains offices in New York City; Washington, DC; Durham, NC;
Ewing, NJ; and Lewisville, TX.

History
The AICPA and its predecessors have a history dating back to 1887, when the
American Association of Public Accountants (AAPA) was formed. In 1916, the
American Association was succeeded by the Institute of Public Accountants, at which
time there was a membership of 1,150. The name was changed to the American
Institute of Accountants in 1917 and remained so until 1957, when it changed to its
current name of the American Institute of Certified Public Accountants. The
American Society of Certified Public Accountants was formed in 1921 and acted as a
federation of state societies. The Society was merged into the Institute in 1936 and, at
that time, the Institute agreed to restrict its future members to CPAs.

Professional standards setting

The AICPA sets generally accepted professional and technical standards for CPAs in
many areas. Until the 1970s, the AICPA held a virtual monopoly in this field. In the
1970s, however, it transferred its responsibility for setting generally accepted
accounting principles (GAAP) to the newly formed Financial Accounting Standards
Board (FASB.) Following this, it retained its standards setting function in areas such
as financial statement auditing, professional ethics, attest services, CPA firm quality
control, CPA tax practice, Business Valuation, and financial planning practice. Before
passage of the Sarbanes-Oxley law, AICPA standards in these areas were considered
"generally accepted" for all CPA practitioners.

In the early 2000s, federal public policy makers concluded that where independent
financial statement audits of public companies regulated by the U.S. Securities and
Exchange Commission are concerned, that the AICPA's standards setting and related
enforcement roles should be transferred to a government empowered body with more
enforcement authority than a non-governmental professional association, such as the
AICPA could provide. As a result, the Sarbanes-Oxley law created the Public
Company Accounting Oversight Board (PCAOB) which has jurisdiction over
virtually every area of CPA practice in relation to public companies. However, the
AICPA retains its considerable standards setting, ethics enforcement and firm practice
quality monitoring roles for the majority of practicing CPAs, who serve privately held
business and individuals.

2. The Financial Accounting Standards Board (FASB)

The Financial Accounting Standards Board (FASB) is a private, not-for-profit
organization whose primary purpose is to develop generally accepted accounting
principles (GAAP) within the United States in the public's interest. The Securities and
Exchange Commission (SEC) designated the FASB as the organization responsible
for setting accounting standards for public companies in the U.S. It was created in
1973, replacing the Committee on Accounting Procedure (CAP) and the Accounting
Principles Board (APB) of the American Institute of Certified Public Accountants
(AICPA).

Mission statement

The FASB's mission is "to establish and improve standards of financial accounting
and reporting for the guidance and education of the public, including issuers, auditors,
and users of financial information."[1] To achieve this, FASB has five goals[1]:

 Improve the usefulness of financial reporting by focusing on the primary

characteristics of relevance and reliability, and on the qualities of
comparability and consistency.
 Keep standards current to reflect changes in methods of doing business and in
the economy.
 Consider promptly any significant areas of deficiency in financial reporting
that might be improved through standard setting.
 Promote international convergence of accounting standards concurrent with
improving the quality of financial reporting.
 Improve common understanding of the nature and purposes of information in
financial reports.

Description

The FASB is not a governmental body. The SEC has legal authority to establish
financial accounting and reporting standards for publicly held companies under the
Securities Exchange Act of 1934. Throughout its history, however, Commission
policy has been to rely on the private sector for this function to the extent that the
private sector demonstrates ability to fulfill the responsibility in the public
interest.[citation needed]

The FASB is part of a structure that is independent of all other business and
professional organizations. Before the present structure was created, financial
accounting and reporting standards were established first by the Committee on
Accounting Procedure of the American Institute of Certified Public Accountants
(1936–1959) and then by the Accounting Principles Board, also a part of the AICPA
(1959–73). Pronouncements of those predecessor bodies remain in force unless
amended or superseded by the FASB.

The FASB is subject to oversight by the Financial Accounting Foundation (FAF),

which selects the members of the FASB and the Governmental Accounting Standards
Board and funds both organizations. The Board of Trustees of the FAF, in turn, is
selected in part by a group of organizations including:

 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

Creation of the Codification

On July 1, 2009, the FASB announced the launch of its Accounting Standards
Codification, declaring it to be "the single source of authoritative nongovernmental
U.S. generally accepted accounting principles." The Codification organizes the many
pronouncements that constitute U.S. GAAP into a consistent, searchable format. [3]
The Codification is not to be confused with the FASB's Conceptual Framework, a
project begun in 1973 to develop a sound theoretical basis for the development of
accounting standards in the United States.

FASB pronouncements
Main article: List of FASB Pronouncements

In order to establish accounting principles, the FASB issues pronouncements publicly,

each addressing general or specific accounting issues. These pronouncements are:

 Statements of Financial Accounting Standards

 Statements of Financial Accounting Concepts
 FASB Interpretations
 FASB Technical Bulletins
 EITF Abstracts

FASB 11 Concepts

 Money measurement
 Entity
 Going concern
 Cost
 Dual aspect
 Accounting period
  Conservation[disambiguation needed]
 Realization
 Matching
 Consistency
 Materiality

3. Standards Vs Principles
To answer this question, we must first define what IAS and GAAP are, in order to get
a better grasp of the function they serve in the world of accounting.

The acronym "IAS" stands for International Accounting Standards. This is a set
of accounting standards set by the International Accounting Standards Committee
(IASC), located in London, England. The IASC has a number of different bodies, the
main one being the International Accounting Standards Board (IASB), which is the
standard-setting body of the IASC. The acronym "GAAP" stands for Generally
Accepted Accounting Principles.

The IASC does not set GAAP, nor does it have any legal authority over GAAP. The
IASC can be thought of as merely a very influential group of people who love making
up accounting rules. However, a lot of people actually do listen to what the IASC and
IASB have to say on matters of accounting.

When the IASB sets a brand new accounting standard, a number of countries tend to
adopt the standard, or at least interpret it, and fit it into their individual country's
accounting standards. These standards, as set by each particular country's accounting
standards board, will in turn influence what becomes GAAP for each particular
country. For example, in the United States, the Financial Accounting Standards Board
(FASB) makes up the rules and regulations which become GAAP.

The best way to think of GAAP is as a set of rules that accountants follow. Each
country has its own GAAP, but on the whole, there aren't many differences between
countries - interpretations might vary from country to country, but everyone tends to
agree that a company can't simply make up billions of dollars worth of revenue
and put it on its books. Every country, in turn, influences the other countries that
follow GAAP.

4. International Accounting Standards Board

(IASB)
The International Accounting Standards Board (IASB) is an independent, privately-
funded accounting standard-setter based in London, England.

The IASB was founded on April 1, 2001 as the successor to the International
Accounting Standards Committee (IASC). It is responsible for developing
International Financial Reporting Standards (the new name for International
Accounting Standards issued after 2001), and promoting the use and application of
these standards.
Foundation of the IASB

In April 2001, the International Accounting Standards Committee Foundation

(IASCF), since renamed as the IFRS Foundation, was formed as a not-for-profit
corporation incorporated in the US state of Delaware. The IFRS Foundation is the
parent entity of the International Accounting Standards Board (IASB), an independent
accounting standard-setter based in London, England.

On 1 March 2001, the IASB assumed accounting standard-setting responsibilities

from its predecessor body, the International Accounting Standards Committee
(IASC). This was the culmination of a restructuring based on the recommendations of
the report Recommendations on Shaping IASC for the Future.

The IASB structure has the following main features: the IFRS Foundation is an
independent organization having two main bodies, the Trustees and the IASB, as well
as a IFRS Advisory Council and the IFRS Interpretations Committee (formerly the
IFRIC). The IASC Foundation Trustees appoint the IASB members, exercise
oversight and raise the funds needed, but the IASB has responsibility for setting
International Financial Reporting Standards (international accounting standards).

IASB Members
The IASB has 15 Board members, each with one vote. They are selected as a group of
experts with a mix of experience of standard-setting, preparing and using accounts,
and academic work.

The IFRS Interpretations Committee has 14 members. Its brief is to provide timely
guidance on issues that arise in practice.

A unanimous vote is not necessary in order for the publication of a Standard,

exposure draft, or final "IFRIC" Interpretation. The Board's 2008 Due Process manual
stated that approval by nine of the members is required.

IASB Due Process

The IASB Handbook describes the consultative arrangements of the IASB. The Board
also publishes a brief guide on how standards are developed.

Funding

The IFRS Foundation raises funds for the operation of the IASB. Most contributors
are banks and other companies which use or have an interest in promoting
international standards. In 2008, American companies gave £2.4m, more than those of
any other country. However, contributions fell in the wake of the financial crisis of
2007–2010, and a shortfall was reported in 2010.

5. International Financial Reporting Standards

(IFRS)
International Financial Reporting Standards (IFRS) are principles-based
Standards, Interpretations and the Framework (1989) [1] adopted by the International
Accounting Standards Board (IASB).

Many of the standards forming part of IFRS are known by the older name of
International Accounting Standards (IAS). IAS were issued between 1973 and
2001 by the Board of the International Accounting Standards Committee (IASC). On
1 April 2001, the new IASB took over from the IASC the responsibility for setting
International Accounting Standards. During its first meeting the new Board adopted
existing IAS and SICs. The IASB has continued to develop standards calling the new
standards IFRS.

Requirements of IFRS

IFRS financial statements consist of (IAS1.8)

 a Statement of Financial Position

 a Statement of Comprehensive Income or two separate statements
comprising an Income Statement and separately a Statement of
Comprehensive Income, which reconciles Profit or Loss on the Income
statement to total comprehensive income
 a Statement of Changes in Equity (SOCE)
 a Cash Flow Statement or Statement of Cash Flows
 notes, including a summary of the significant accounting policies

Comparative information is required for the prior reporting period (IAS 1.36). An
entity preparing IFRS accounts for the first time must apply IFRS in full for the
current and comparative period although there are transitional exemptions (IFRS1.7).

On 6 September 2007, the IASB issued a revised IAS 1 Presentation of Financial

Statements. The main changes from the previous version are to require that an entity
must:

 present all non-owner changes in equity (that is, 'comprehensive

income' ) either in one Statement of comprehensive income or in two
statements (a separate income statement and a statement of
comprehensive income). Components of comprehensive income may
not be presented in the Statement of changes in equity.
 present a statement of financial position (balance sheet) as at the
beginning of the earliest comparative period in a complete set of
financial statements when the entity applies the new standard.
 present a statement of cash flow.
 make necessary disclosure by the way of a note.

The revised IAS 1 is effective for annual periods beginning on or after 1 January
2009. Early adoption is permitted.

IASB current projects

Much of its work is directed at convergence with US GAAP.

Adoption of IFRS

IFRS are used in many parts of the world, including the European Union, Hong Kong,
Australia, Malaysia, Pakistan, GCC countries, Russia, South Africa, Singapore and
Turkey. As of 27 August 2008, more than 113 countries around the world, including
all of Europe, currently require or permit IFRS reporting. Approximately 85 of those
countries require IFRS reporting for all domestic, listed companies. In addition, the
US is also gearing towards IFRS. The SEC in the US is slowly but progressively
shifting from requiring only US GAAP to accepting IFRS and will most likely accept
IFRS standards in the long-term.

It is generally expected that IFRS adoption worldwide will be beneficial to investors

and other users of financial statements, by reducing the costs of comparing alternative
investments and increasing the quality of information. Companies are also expected to
benefit, as investors will be more willing to provide financing. However, Ray J. Ball
has expressed some skepticism of the overall cost of the international standard; he
argues that the enforcement of the standards could be lax, and the regional differences
in accounting could become obscured behind a label. He also expressed concerns
about the fair value emphasis of IFRS and the influence of accountants from non-
common-law regions, where losses have been recognized in a less timely manner.

List of Reporting Standards and International Accounting

Standards
(https://en.wikipedia.org/wiki/List_of_International_Financial_Reporting_Standards)

Originally Fully Superseded

No. Title Effective
issued withdrawn by

Disclosure of
Accounting Policies
(1975) January 1,
IAS 1 1975
1975
Presentation of
Financial
Statements (1997)

Valuation and
Presentation of
Inventories in the
Context of the January 1,
IAS 2 1976
Historical Cost 1976
System (1975)
Inventories (1993)

Consolidated IAS
January 1, January 1,
IAS 3 Financial 1976 27 and IAS
1977 1990
Statements 28
IAS 4 Depreciation 1976 January 1, July 1, 1999 IAS 36
 Originally Fully Superseded
No. Title Effective
issued withdrawn by

Accounting 1977
Information to Be
Disclosed in January 1,
IAS 5 1976 July 1, 1998 IAS 1
Financial 1977
Statements
Accounting
January 1, January 1,
IAS 6 Responses to 1977 IAS 15
1978 1983
Changing Prices
Statement of
Changes in
Financial Position
(1977)
January 1,
IAS 7 1977
Cash Flow 1979
Statements (1992)
Statement of Cash
Flows (2007)

Unusual and Prior

Period Items and
Changes in
Accounting Policies
(1978)
Net Profit or Loss
for the Period,
Fundamental Errors January 1,
IAS 8 1978
and Changes in 1979
Accounting Policies
(1993)
Accounting
Policies, Changes in
Accounting
Estimates and
Errors (2003)

Accounting for
Research and January 1,
IAS 9 1978 July 1, 1999 IAS 38
Development 1980
Activities
Contingencies and
Events Occurring
January 1,
IAS 10 After the Balance 1978
Sheet Date (1978) 1980
Events After the
 Originally Fully Superseded
No. Title Effective
issued withdrawn by

Balance Sheet Date

(1999)
Events after the
Reporting Period
(2007)

Accounting for
Construction
January 1,
IAS 11 Contracts (1979) 1979 IFRS 15
1980
Construction
Contracts (1993)

Accounting for
Taxes on Income
January 1,
IAS 12 (1979) 1979
1981
Income
Taxes (1996)

Presentation of
January 1,
IAS 13 Current Assets and 1979 July 1, 1998 IAS 1
1981
Current Liabilities
Reporting Financial
Information by
January 1, January 1,
IAS 14 Segment (1981) 1981 IFRS 8
1983 2009
Segment reporting
(1997)

Information
Reflecting the January 1, January 1,
IAS 15 1981 N/A
Effects of Changing 1983 2005
Prices
Accounting for
Property, Plant and
Equipment (1982) January 1,
IAS 16 1982
Property, Plant 1983
and
Equipment (1993)

Accounting for
January 1, January 1,
IAS 17 Leases (1982) 1982 IFRS 16
1984 2019
Leases (1997)

Revenue January 1, January 1,

IAS 18 1982 IFRS 15
Recognition (1982) 1984 2018
 Originally Fully Superseded
No. Title Effective
issued withdrawn by

Revenue (1993)

Accounting for
Retirement Benefits
in Financial
Statements of
January 1,
IAS 19 Employers (1983) 1983
1985
Retirement Benefit
Costs (1993)
Employee Benefits
(1998)

Accounting for
Government Grants
January 1,
IAS 20 and Disclosure of 1983
1984
Government
Assistance
Accounting for the
Effects of Changes
in Foreign
Exchange Rates
January 1,
IAS 21 (1983) 1983
1985
The Effects of
Changes in
Foreign Exchange
Rates (1993)

Accounting for
Business
Combinations
January 1, April 1,
IAS 22 (1983) 1983 IFRS 3
1985 2004
Business
Combinations
(1993)

Capitalisation of
Borrowing Costs
January 1,
IAS 23 (1984) 1984
1986
Borrowing Costs
(1993)

Related Party January 1,

IAS 24 1984
Disclosures 1986
IAS 25 Accounting for 1986 January 1, January 1, IAS
 Originally Fully Superseded
No. Title Effective
issued withdrawn by

Investments 1987 2001 39 and IAS

40
Accounting and
Reporting by January 1,
IAS 26 1987
Retirement Benefit 1988
Plans
Consolidated
Financial
Statements and
Accounting for
Investments in
January 1,
IAS 27 Subsidiaries (1989) 1989
1990
Consolidated and
Separate Financial
Statements (2003)
Separate Financial
Statements (2011)

Accounting for
Investments in
Associates (1989)
Investments in
Associates & January 1,
IAS 28 1989
ASSOCIATES 1990
(2003)
Investments in
Associates and Joint
Ventures (2011)

Financial Reporting
January 1,
IAS 29 in Hyperinflationary 1989
1990
Economies
Disclosures in the
Financial
Statements of January 1, January 1,
IAS 30 1990 IFRS 7
Banks and Similar 1991 2007
Financial
Institutions
Financial Reporting
of Interests in Joint IFRS
January 1, January 1,
IAS 31 Ventures (1990) 1990 11 and IFRS
1992 2013
Interests in Joint 12
Ventures (2003)
 Originally Fully Superseded
No. Title Effective
issued withdrawn by

Financial
Instruments:
Disclosure and
January 1,
IAS 32 Presentation (1995) 1995
1996
Financial
Instruments:
Presentation (2005)

Earnings per January 1,

IAS 33 1997
Share 1999
Interim Financial January 1,
IAS 34 1998
Reporting 1999
Discontinuing July 1, January 1,
IAS 35 1998 IFRS 5
Operations 1999 2005
Impairment of July 1,
IAS 36 1998
Assets 1999
Provisions, Conting
July 1,
IAS 37 ent Liabilities and 1998
1999
Contingent Assets
July 1,
IAS 38 Intangible Assets 1998
1999
Financial
Instruments: January 1, January 1,
IAS 39 1998 IFRS 9
Recognition and 2001 2018
Measurement
January 1,
IAS 40 Investment Property 2000
2001
January 1,
IAS 41 Agriculture 2000
2003
First-time Adoption
of International January 1,
IFRS 1 2003
Financial Reporting 2004
Standards
Share-based January 1,
IFRS 2 2004
Payment 2005
Business April 1,
IFRS 3 2004
Combinations 2004
January 1, January 1,
IFRS 4 Insurance Contracts 2004 IFRS 17
2005 2021
IFRS 5 Non-current Assets 2004 January 1,
 Originally Fully Superseded
No. Title Effective
issued withdrawn by

Held for Sale and 2005

Discontinued
Operations
Exploration for and
January 1,
IFRS 6 Evaluation of 2004
2006
Mineral Resources
Financial
January 1,
IFRS 7 Instruments: 2005
2007
Disclosures
Operating January 1,
IFRS 8 2006
Segments 2009
2009
Financial January 1,
IFRS 9 (updated
Instruments 2018
2014)
Consolidated
IFRS January 1,
Financial 2011
10 2013
Statements
IFRS January 1,
Joint Arrangements 2011
11 2013
Disclosure of
IFRS January 1,
Interests in Other 2011
12 2013
Entities
IFRS Fair Value January 1,
2011
13 Measurement 2013
IFRS Regulatory Deferral January 1,
2014
14 Accounts 2016
Revenue from
IFRS January 1,
Contracts with 2014
15 2018
Customers
IFRS January 1,
Leases 2016
16 2019
January 1,
IFRS Insurance
2017 2021
17 contracts

Adoptation Status of International Accounting Standards (IASs) by ICAB

IAS IAS Title IAS Effective Date Remarks

No.
Presentation of Financial
1 on or after 1 Jan 2010
Statements
2 Inventories on or after 1 January 2007
7 Statement of Cash Flows on or after 1 January 1999
Accounting Policies, Changes
8 in Accounting Estimates and on or after 1 January 2007
Errors
Events after the Reporting
10 on or after 1 January 1999
Period
11 Construction Contracts on or after 1 January 1999
12 Income Taxes on or after 1 January 1999
16 Property, Plant & Equipment on or after 1 January 2007
17 Leases on or after 1 January 2007
18 Revenue on or after 1 January 2007
19 Employee Benefits on or after 1 January 2013
Accounting of Government
20 Grants and Disclosure of on or after 1 January 1999
Government Assistance
The Effects of Changes in
21 on or after 1 January 2007
Foreign Exchange Rates
23 Borrowing Costs on or after 1 January 2010
24 Related Party Disclosures on or after 1 January 2007
Accounting and Reporting by
26 on or after 1 January 2007
Retirement Benefit Plans
27 Separate Financial Statements on or after 1 January 2013
Investments in Associates and
28 on or after 1 January 2013
Joint Ventures
Financial Reporting in
IAS 29 on or after 1 January 2015
Hyperinflationary Economics
31 Interest in Joint Ventures on or after 1 January 2007
Financial Instruments:
32 on or after 1 January 2010
Presentation
33 Earnings per Share on or after 1 January 2007
34 Interim Financial Reporting on or after 1 January 1999
36 Impairment of Assets on or after 1st January 2005
Provisions, Contingent
37 Liabilities and Contingent on or after 1 January 2007
Assets
38 Intangible Assets on or after 1 January 2005
Financial Instruments:
39 on or after 1 January 2010
Recognition and Measurement
40 Investment Property on or after 1 January 2007
 41 Agriculture on or after 1 January 2007

Adoptation Status of International Financial Reporting Standards (IFRS) by ICAB

IFRS Title Effective Date on or after

IFRS 1 First-time adoption of International financial 1 January 2009

Reporting Standards
IFRS 2 Share-based Payment 1 January 2007
IFRS 3 Business Combinations 1 January 2010
IFRS 4 Insurance Contracts 1 January 2010
Non-current Assets Held for Sale and Discontinued
IFRS 5 1 January 2007
Operations
Exploration for and Evaluation of Mineral
IFRS 6 1 January 2007
Resources
IFRS 7 Financial Instruments: Disclosures 1 January 2010
IFRS 8 Operating Segments 1 January 2010
NA (Not yet adopted but under review
IFRS 9 Financial Instruments
process)
IFRS 10 Consolidated Financial Statements 1 January 2013
IFRS 11 Joint Arrangements 1 January 2013
IFRS 12 Disclosure of Interests in other Entities 1 January 2013
IFRS 13 Fair Value Measurement 1 January 2013