The Financial Accounting Standards Board (FASB) was established with the Sarbanes-Oxley Act of 1933 (SOX) to establish accounting standards for protection of investors and other users of financial statements. Standards implemented by FASB have the full effect of law and holds public accounting firms accountable for assurance that financial statements are accurate and fairly presented to the investing public. It is vital to the accounting profession that public accounting firms stay abreast on changes in the standards as they become available.
The purpose of this research paper is to show how FASB standards affect the public CPA firm. SEC requires registration of corporations to contain a public accountant opinion of the accuracy, transparency, and visibility of financial statements in efforts to protect the investment community by providing appropriate amounts of disclosure as to the risks involved with investments in publicly traded corporations (Arens, 2006). The public accountant's opinion provides a higher assurance with financial statements, which requires the accountants to understand and follow the FASB standards when working with corporate financial statements.
Research has found that FASB has issued an Accounting Standards Codification (ASC), approved revision in employer disclosure for multiemployer pension plans, has implemented more changes in 2012, and has ongoing efforts to converge with International Accounting Standards Board (ISAB). The ASC changes the way that disclosures are referenced and sources of GAAP are used. Multiemployer plans have more disclosure requirements. Changes in the test of goodwill and the presentation of comprehensive income came about in 2012. Ongoing convergence efforts will continue to bring about more changes for compliance purposes. It would be the responsibility of the firm to stay abreast as changes come about.
The purpose of this report is to demonstrate how the Financial Accounting Standards Board (FASB) has a huge impact on public accounting firms in respects of fair presentation of financial reports and holds accounting firms responsible for ensuring the accuracy and transparency. The FASB is a standard setting agency for public companies registered with the Securities and Exchange Commission (SEC) (Taub, 2008). The FASB was established with the Sarbanes-Oxley Act 1933 (SOX) and requires the FASB keep standards current with business environment changes to the extent international convergence is based on high quality accounting standards and appropriate to protect investors (Williams, 2009).
FASB standards have the full effect of the law and all SEC registrants are required to adhere to all FASB standards. Its mission is "to establish and improve standards of financial accounting and reporting" (Facts about FASB). SOX requires financial statements be accompanied with the opinion of an independent public accountant as a part of the SEC registration (Arens, 2006). SOX have placed high standards of financial reporting on corporations to provide full disclosure, higher transparency, and higher visibility for a higher protection of the investment community. In the convergence with International Financial Reporting Standards (IFRS), FASB has implemented changes or a new codification, more disclosure requirements for multi-employer pension plans, as well as changes in the test of goodwill impairment and how components of comprehensive income are disclosed. There are continuing debates on more changes for lease requirements, elimination of LIFO inventory method, revenue recognition, and stricter standards for derivatives and off-balance sheet assets. As CPA of this firm, this report has been prepared for the manager to understand what FASB is and the importance of following the FASB Standards.
The Accounting Standards Codification (ASC) became effective on July 1, 2009 (Gallagher, 2012). Under FAS 168 (FASB Accounting Standards Codification Will Have an Impact on SEC Reports, 2009), effective September 15, 2009, the codification affects financial statement disclosures, sources of general accepted accounting principles (GAAP), GAAP pronouncement by topic, and SEC disclosure.
The codification simplifies access by topic, improves accuracy of research, mitigates risk of non-compliance, streamlines research to offer guidance and provide basis for conclusions on changes with FASB updates, provides real-time updates, and assists in IFRS convergence. It is written in sections that combine all standards of FASB, AICPA, and EITF, including the SEC content concerning financial reporting and related disclosures in a separate section. The codification excludes management discussion and analysis, auditing matters, independence matters government standards, non-GAAP, and 'non-essential' content. Disclosures now require plain English reference to codification topics.
The FASB also has issued amendments to some of the standards. Financial Instruments (Topic 825) amends update No. 2011-04 and "clarifies the scope and applicability of a particular disclosure to nonpublic entities" (FASB Accounting Standards Update No. 2013-03, 2013). Nonpublic entities with $100 million in assets or one or more derivatives are not exempt from these disclosures. Comprehensive Income (Topic 220) "requires an entity to report the effect of significant amounts reclassified out of other comprehensive income in its entirety to net income" (FASB Accounting Standards Update No. 2013-02, 2013). Balance Sheet (Topic 210) clarifies the intended scope of disclosures under Section 210-20-50.
Analysis: For the publicly held accounting firm, it is important to know, understand, and follow this codification to remain in compliance. The firm would be held responsible for ensuring that financial statements of the firm, as well as customer financial statements the firm prepares or audits, are in conformity with the codification. All references to GAAP should be verified and checked for accuracy. For compliance purposes, the public accounting firm is responsible to keep up with updates as they arise to the codification.
Finding #2 Employer Disclosure for Multiemployer Pension Plans
FASB approved a revision to provide more information about an employer's financial obligations to multiemployer pension plans (FASB Improves Employer Disclosure for Multiemployer Pension Plans, 2011).
"Multiemployer pension plans are mainly used to provide post-retirement benefits to union employees, who typically work for different employers over the years but accrue benefits in a single plan" (Cohn, 2011). Disclosures for these plans should now include: any comprehensive deliberations, amounts of employer contributions to each plan, indication to whether the employer contribution represents more than 5% of the total plan contribution, indication of which plans are subject to funding improvement, expiration dates of collective bargaining agreements and any minimum funding arrangements, the most recent certified funding status of the plan, and description of the nature and effect of any changes affecting comparability for each period a statement of income represents. There should be a narrative description of the general nature of the plans and the employer's participation that indicates how the risks of participation are different from single-employer plans (Schini, 2012).
Analysis: If the public accounting firm participates in a multiemployer plan or prepares statements for a customer that participates in these plans, it would be the responsibility of the firm to ensure that the new disclosure rules are used in the financial statement disclosures. When auditing financial statements for an opinion, the auditor of the firm would be required to ensure the disclosures are in the customer's financial statements.
Finding #3 More Changes Due to FASB and ISAB Convergence
FASB and the International Accounting Standards Board (IASB) are working together to converge all public companies to international standards (Pfahl, 2011).
Starting in 2012 the test for goodwill and indefinite lived intangibles impairment now has the option to first perform a qualitative assessment to determine likelihood of impairment (Brendel, 2013). If it shows likelihood, then the actual test for goodwill impairment must be performed. FASB Update Topic 220: Presentation of Comprehensive Income (IASB and FASB align presentation requirements for other comprehensive income, 2011) does not address which items of other comprehensive income should be presented in profit or loss, but requires other comprehensive income to be presented as part of, or close proximity to, profit and loss in the income statement. The presentation of comprehensive income now requires that components of comprehensive income to be shown in a simple statement with net income or in a separate statement of comprehensive income that is consecutive with the income statement. This was effective for July 1, 2012, but more consideration is being made to include which components of other comprehensive income should be included in the profit and loss section of the income statement.
FASB Accounting Standards Update 2011-04: Fair Value Measurement, Topic 820 became effective for statements after December 15, 2011 (FASB, IASB Issue "Largely Identical" Guidance on Fair Value, 2011). It provides guidance on how fair value measurement should be applied. The amendments include clarification of the board's intent and particular principle changes and requirements for measuring and disclosing fair value.
Areas of proposed changes are; leases being accounted for on the balance sheet, revenue recognition proposed to a six step model where recognition is recorded after performance of obligations are satisfied, stricter accounting standards for derivatives and off-balance sheet assets (Onaran, 2013), and elimination of the LIFO inventory method. The proposal for leases indicates that the majority of leases will no longer be recorded as operating leases and would be a part of the monthly profit and loss expenditure (Kamen, 2013). Standards for derivatives and off-balance sheet assets tightened in 2009 and proposed changes…