Question

Presented below are comments made in the financial press.InstructionsPrepare responses to the requirements in each item.

a) Rep. John Dingell, at one time the ranking Democrat on the House Commerce Committee, threw his support behind the FASB’s controversial derivatives accounting standard and encouraged the FASB to adopt the rule promptly. Indicate why a member of Congress might feel obligated to comment on his proposed FASB standard.

b) In a strongly worded letter to Senator Lauch Faircloth (R-NC) and House Banking Committee Chairman Jim Leach (R-IA), the American Institute of Certified Public Accountants (AICPA) cautioned against government intervention in the accounting standard-setting process, warning that it had the potential of jeopardizing U.S. capital markets. Explain how government intervention could possibly affect capital markets adversely.

Short answer

a) Given the financial outcomes of GAAP, it is not astonishing that special interest categories become critical and vocal (some supporting while some opposing) when rules are prepared. The FASB’s derivative accounting declaration is no exception

b) Set up of Generally Accepted Accounting Principles (GAAP) through political method will possibly result in the outcomes such as an absence of coherence that will lead to conflicting applications. Moreover, there are so many substitutes.

Step-by-step solution

Meaning of FASB Standard

The Financial Accounting Standard Board (FASB) is an unconventional governmental entity for setting up and framing the accounting and financial reporting standards for firms and governmental entities in the United States.

Explanation for Statement ‘a’

Regarding the GAAP financial outcomes, it is not shocking that thespecial interest class becomes critical and vocal when standards are being set up.Moreover,they also stated that the proposal might not encourage reasonable risk management events and, in a few cases, could display ambiguous financial information.

As a result, Congress is usually approached to apply pressure on the FASB to alter its pronouncements. In the argument of stock option, the industry was entirely productive in approaching Congress to pressurise the FASB to alter its findings. In the derivative argument, Rep. Richard Baker presented a bill which would pressure the SEC to certify each standard provided by the FASB officially.

Explanation for the statement ‘b’

EstablishingGAAP with the political processwillresultin the outcomes such as the absence of disclosure thatdiminishes transparencyand is not broad in scope. In the absence of an independent process, GAAP will be dependent on political agreement. Using generally accepted accounting principles for the S and L firm would have compelled regulators to prohibit the activities of many S&Ls.

Another evidence of the issue of government intervention is displayed in the accounting standards used by a few countries around the globe. Wholeness and transparency of information required by creditors and investors are unavailable to fulfil other purposes.