The Financial Accounting Standards Board: Generally Accepted Accounting Principles

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Introduction of Topic and Facts

The Financial Accounting Standards Board is an independent, non-profit organization that establishes specific accounting standards for companies in the private and public sectors. The set of rules is called Generally Accepted Accounting Principles or GAAP. The organization annually publishes the Accounting Standards Update (ASU) because the initial project for revenue recognition did not satisfy all requirements for all industries. The ASU published in 2014 discusses the revenue from contracts with customers earned by the companies (Financial Accounting Standards Board, 2014a). The update has three sections that discuss the summaries and amendments that constitute the revenue from contracts with customers, subtopics in the codification and status tables, and background information with conclusions.

The FASB revised its consolidation guidance, which could significantly affect some companies. The new ASU simplifies U.S. GAAP by removing entity-specific consolidation guidelines for limited partnerships (Financial Accounting Standards Board, 2014a). Additionally, it updates the evaluation of related parties, kick-out rights, fee structures, and other components of the consolidation analysis. The revisions repeal the FASB Statement 167 indefinite deferral for specific investment funds and replace it with a permanent money market funds scope exception (Financial Accounting Standards Board, 2014a). All organizations are impacted, but those in the financial services, real estate, and energy sectors are particularly under the influence.

Summary of the Financial Accounting Area & GAAP

The term GAAP (Generally Accepted Accounting Principles) refers to a set of widely used standards and accounting procedures for financial reporting. The acronym is pronounced gap. Definitions of concepts and guiding principles are included in GAAP standards, along with industry-specific regulations. The goal of GAAP is to guarantee that financial reporting is transparent and uniform from one public company to another and from one accounting period to another.

The process of documenting, compiling, and reporting the numerous transactions occurring from corporate activities throughout time is known as financial accounting. The creation of financial statements, such as the balance sheet, income statement, and cash flow statement, which document the operating performance of the firm over a given time period, summarizes these transactions. Work prospects for a financial accountant may be found in both the public and commercial sectors. The tasks of a general accountant, who works for oneself or herself rather than directly for a firm or organization, may be different from those of a financial accountant.

A technique for creating financial statements that records transactions irrespective of cash consumption are the accrual method of financial accounting. Journal entries may be made before an item is paid for, and certain financial accounting concepts take into consideration a transactions effects over time (as opposed to the entire impact being recorded in the period the cash impact happened). One can imagine the scenario where a business is paid $1,000 for advisory work that will be done the following month. According to the principles of the accrual system of financial accounting, the corporation is not permitted to record the $1,000 as revenue because, technically, no labor has been done and no money has been made. This transaction is recorded as a debit to cash and a credit to unearned revenue, a liability account, in accordance with the accrual method of financial accounting. The business clears the unearned revenue accounting and records actual revenue when it generates income the next month.

Unpaid costs are another illustration of the accrual approach of accounting. It is possible to imagine if a business was presented with a $5,000 utility bill for the month of July. The accrual method of accounting requires the corporation to record the transaction in July, even if the bill is not paid until August. The business records a credit to accounts payable in addition to debiting Utility Expenses. The credit is cleared after the invoice has been paid.

Detailed Discussion of the Case

As has been mentioned above, the ASU of 2014 draws attention to the revenue that companies earn from contracts with customers. The document was issued to meet various objectives that include removing inconsistencies in revenue requirements, explaining how to address revenue issues, and simplifying the preparation of financial statements (Financial Accounting Standards Board, 2014a). The document is divided into three sections, and each of them requires specific attention.

Section A

Being the first part of the larger document, Section A presents much useful and valuable information. On the one hand, amendments in this part codify the Boards decisions in the revenue project and create a new Topic 606, Revenue from Contracts with Customers (Financial Accounting Standards Board, 2014a, p. 13). This aspect is essential since it determines how information should be reported to users of financial statements. On the other hand, Section A introduces Subtopic 340-40, Other Assets and Deferred Costs-Contracts with Customers (Financial Accounting Standards Board, 2014a). This subtopic includes guidance on accounting for the incremental costs of obtaining a contract with a customer and for the costs incurred to fulfill a contract with a customer (Financial Accounting Standards Board, 2014a, p. 18). That is why one can stipulate that Section A presents valuable information.

Section B

It is reasonable to remember that the ASU of 2014 introduced changes and improvements to the previously existing regulations. Thus, Section B includes amendments that conform guidance throughout the Codification as a result of the Boards decisions in the revenue project (Financial Accounting Standards Board, 2014a, p. 13). This part of the larger document includes the strikeout text that is preceded by its corrected interpretation and formulation. For example, the revenue definition was totally rewritten to create a shortened version (Financial Accounting Standards Board, 2014b). Furthermore, one should add that Section B does not always rewrite older information with the new one. This section can add new details, and this information is underlined to make it easier for readers to locate it (Financial Accounting Standards Board, 2014b). Thus, Section B provides its target audience with useful details regarding the topics under consideration.

Section C

Even though Section C does not provide much new factual information about revenue and companies, it is still significant. This part includes background information and presents conclusions of the entire document (Financial Accounting Standards Board, 2014c). In particular, Section C describes how the ASU was adopted, who participated in its adoption, and what procedures took place (Financial Accounting Standards Board, 2014c). This and similar information is significant because it allows readers to have a better understanding of the ASU and its implications. That is why it is not reasonable to undervalue the importance of Section C.

Personal Conclusion

I can firmly state that the ASU is an important and perfectly composed document. It is challenging to argue with Reimers (2011), who states that quality and timing are essential phenomena when one deals with accounting procedures. That is why it is necessary to be aware of the existing regulations and know how and when these should be applied. Simultaneously, I agree with Smith (2019) that it is beneficial for a future career to become familiar with specific information early. That is why I have attentively read the ASU to understand why this regulation is significant and how it can be applied. It is reasonable to believe that the information presented above will be beneficial for my future professional activity because I know much information about revenues that companies receive from contracts with customers.

General Conclusion

The Accounting Standards Update is an important regulation that discusses the revenue from contracts with customers earned by the companies. The Financial Accounting Standards Board is an author of this regulation that is essential in the sphere of accounting. In particular, one should admit that the document is issued regularly, and the current analysis deals with the 2014 version. The Accounting Standards Update consists of three parts, and each of them presents significant information. Section A consists of essential topics and subtopics that refer to revenue and how organizations should approach it. Section B introduces essential amendments that clarify the regulation and make it up-to-date. Finally, Section C brings background information about the Accounting Standards Update creation process and formulates conclusions. It is impossible to state that any section is more significant than the others, which denotes that the target audience should carefully read the entire regulation. In conclusion, there is no doubt that this information is valuable for people who want to become high-quality professionals in the accounting sphere.

References

Financial Accounting Standards Board. (2014a). Accounting standards update: Section A [PDF document].

Financial Accounting Standards Board. (2014b). Accounting standards update: Section B [PDF document].

Financial Accounting Standards Board. (2014c). Accounting standards update: Section C [PDF document].

Reimers, J. L. (2011). Financial accounting: A business process approach (3^rd ed.). Pearson.

Smith, M. (2019). A compilation of accounting case studies (Publication No. 1081) [Undergraduate Thesis, University of Mississippi]. Web.

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