Resources are limited. As a result, people try to conserve them and ensure that they are used effectively. Efficient use of resources often determines whether a business thrives. This fact places a substantial burden on the accounting profession.

Accountants must measure performance accurately and fairly on a timely basis, so that the right managers and companies are able to attract investment capital. For example, relevant and reliable financial information allows investors and creditors to compare the income and assets employed by such companies as IBM, McDonald's, Microsoft, and Ford. Because these users can assess the relative return and risks associated with investment opportunities, they channel resources more effectively. Illustration 1-1 shows how this process of capital allocation works.

Figure 1-1. Capital Allocation Process

An effective process of capital allocation is critical to a healthy economy. It promotes productivity, encourages innovation, and provides an efficient and liquid market for buying and selling securities and obtaining and granting credit.^[1] Unreliable and irrelevant information leads to poor capital allocation, which adversely affects the securities markets.

"It's the accounting." That's what many investors seem to be saying these days. Even the slightest hint of any accounting irregularity at a company leads to a subsequent pounding of the company's stock price. For example, the Wall Street Journal has run the following headlines related to accounting and its effects on the economy.

It now has become clear that investors must trust the accounting numbers or they will abandon the market and put their resources elsewhere. With investor uncertainty, the cost of capital increases for companies who need additional resources. In short, relevant and reliable financial information is necessary for markets to be efficient.

As indicated in the opening story, much is right about financial reporting in the United States. One reason for this success is that our financial statements and related disclosures capture and organize financial information in a useful and reliable fashion. However, much still needs to be done. For example, if we move to the year 2020 and look back at financial reporting today, we might read the following:

We believe each of these challenges must be met for the accounting profession to provide the type of information needed for an efficient capital allocation process. We are confident that changes will occur, based on these positive signs:

Changes in these directions will enhance the relevance of financial reporting and provide useful information to financial statement readers.

To establish a foundation for financial accounting and reporting, the accounting profession identified a set of objectives of financial reporting by business enterprises. Financial reporting should provide information that:

International Insight

The FASB and the IASB are presently working on a conceptual framework for financial reporting. This joint project hopefully will develop a common and improved conceptual framework. Initial indications are that the objectives of financial statements will use a decision-usefulness framework, which is consistent with the FASB's present set of objectives.

In brief, the objectives of financial reporting are to provide information that is (1) useful in investment and credit decisions, (2) useful in assessing cash flow prospects, and (3) about company resources, claims to those resources, and changes in them.

The emphasis on "assessing cash flow prospects" does not mean that the cash basis is preferred over the accrual basis of accounting. That is not the case. Information based on accrual accounting generally better indicates a company's present and continuing ability to generate favorable cash flows than does information limited to the financial effects of cash receipts and payments.^[3]

Recall from your first accounting course the objective of accrual-basis accounting: It ensures that a company records events that change its financial statements in the periods in which the events occur, rather than only in the periods in which it receives or pays cash. Using the accrual basis to determine net income means that a company recognizes revenues when it earns them rather than when it receives cash. Similarly, it recognizes expenses when it incurs them rather than when it pays them. Under accrual accounting, a company generally recognizes revenues when it makes sales. The company can then relate the revenues to the economic environment of the period in which they occurred. Over the long run, trends in revenues and expenses are generally more meaningful than trends in cash receipts and disbursements.

The main controversy in setting accounting standards is, "Whose rules should we play by, and what should they be?" The answer is not immediately clear. Users of financial accounting statements have both coinciding and conflicting needs for information of various types. To meet these needs, and to satisfy the fiduciary^[4] reporting responsibility of management, companies prepare a single set of general-purpose financial statements. Users expect these statements to present fairly, clearly, and completely the company's financial operations.

The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Otherwise, each enterprise would have to develop its own standards. Further, readers of financial statements would have to familiarize themselves with every company's peculiar accounting and reporting practices. It would be almost impossible to prepare statements that could be compared.

This common set of standards and procedures is called generally accepted accounting principles (GAAP). The term "generally accepted" means either that an authoritative accounting rule-making body has established a principle of reporting in a given area or that over time a given practice has been accepted as appropriate because of its universal application.^[5] Although principles and practices continue to provoke both debate and criticism, most members of the financial community recognize them as the standards that over time have proven to be most useful. We present a more extensive discussion of what constitutes GAAP later in this chapter.

External financial reporting and auditing developed in tandem with the growth of the industrial economy and its capital markets. However, when the stock market crashed in 1929 and the nation's economy plunged into the Great Depression, there were calls for increased government regulation of business generally, and especially financial institutions and the stock market.

International Insight

The International Organization of Securities Commissions (IOSCO), established in 1987, consists of more than 100 securities regulatory agencies or securities exchanges from all over the world. Collectively, its members represent a substantial proportion of the world's capital markets. The SEC is a member of IOSCO.

As a result of these events, the federal government established the Securities and Exchange Commission (SEC) to help develop and standardize financial information presented to stockholders. The SEC is a federal agency. It administers the Securities Exchange Act of 1934 and several other acts. Most companies that issue securities to the public or are listed on a stock exchange are required to file audited financial statements with the SEC. In addition, the SEC has broad powers to prescribe, in whatever detail it desires, the accounting practices and standards to be employed by companies that fall within its jurisdiction. The SEC currently exercises oversight over 12,000 companies that are listed on the major exchanges (e.g., the New York Stock Exchange and the Nasdaq).

SEC Oversight

The SEC's partnership with the private sector works well. The SEC acts with remarkable restraint in the area of developing accounting standards. Generally, the SEC relies on the FASB to develop accounting standards.

The SEC's involvement in the development of accounting standards varies. In some cases, the SEC rejects a standard proposed by the private sector. In other cases, the SEC prods the private sector into taking quicker action on certain reporting problems, such as accounting for investments in debt and equity securities and the reporting of derivative instruments. In still other situations, the SEC communicates problems to the FASB, responds to FASB exposure drafts, and provides the FASB with counsel and advice upon request.

The SEC's mandate is to establish accounting principles. The private sector, therefore, must listen carefully to the views of the SEC. In some sense the private sector is the formulator and the implementor of the standards.^[6] However, when the private sector fails to address accounting problems as quickly as the SEC would like, the partnership between the SEC and the private sector can be strained. This occurred in the deliberations on the accounting for business combinations and intangible assets. It is also highlighted by concerns over the accounting for off-balance sheet special-purpose entities, highlighted in the failure of Enron and more recently, the subprime crises that led to the failure of IndyMac Bank.

International Insight

The U.S. legal system is based on English common law, whereby the government generally allows professionals to make the rules. The private sector, therefore, develops these rules (standards). Conversely, some countries have followed codified law, which leads to government-run accounting systems.

The American Institute of Certified Public Accountants (AICPA), which is the national professional organization of practicing Certified Public Accountants (CPAs), has been an important contributor to the development of GAAP. Various committees and boards established since the founding of the AICPA have contributed to this effort.

The Wheat Committee's recommendations resulted in the demise of the APB and the creation of a new standard-setting structure composed of three organizations—the Financial Accounting Foundation (FAF), the Financial Accounting Standards Board (FASB), and the Financial Accounting Standards Advisory Council (FASAC). The Financial Accounting Foundation selects the members of the FASB and the Advisory Council, funds their activities, and generally oversees the FASB's activities.

The major operating organization in this three-part structure is the Financial Accounting Standards Board (FASB). Its mission is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, which includes issuers, auditors, and users of financial information. The expectations of success and support for the new FASB relied on several significant differences between it and its predecessor, the APB:

In addition to research help from its own staff, the FASB relies on the expertise of various task force groups formed for various projects and on the Financial Accounting Standards Advisory Council (FASAC). FASAC consults with the FASB on major policy and technical issues and also helps select task force members. Illustration 1-2 shows the current organizational structure for the development of financial reporting standards.

Figure 1-2. Organizational Structure for Setting Accounting Standards

Due Process

In establishing financial accounting standards, the FASB relies on two basic premises: (1) The FASB should be responsive to the needs and viewpoints of the entire economic community, not just the public accounting profession. (2) It should operate in full view of the public through a "due process" system that gives interested persons ample opportunity to make their views known. To ensure the achievement of these goals, the FASB follows specific steps to develop a typical FASB Statement of Financial Accounting Standards, as Illustration 1-3 shows.

Figure 1-3. The Due Process System of the FASB

The passage of a new FASB Standards Statement requires the support of three of the five Board members. FASB Statements are considered GAAP and thereby binding in practice. All ARBs and APB Opinions implemented by 1973 (when the FASB formed) continue to be effective until amended or superseded by FASB pronouncements. In recognition of possible misconceptions of the term "principles," the FASB uses the term financial accounting standards in its pronouncements.

Types of Pronouncements

The FASB issues three major types of pronouncements:

1. Standards, Interpretations, and Staff Positions.

2. Financial Accounting Concepts.

3. Emerging Issues Task Force Statements.

Standards, Interpretations, and Staff Positions. Financial accounting standards issued by the FASB are considered generally accepted accounting principles. In addition, the FASB also issues interpretations that modify or extend existing standards. Interpretations have the same authority, and require the same votes for passage, as standards. The APB also issued interpretations of APB Opinions. Both types of interpretations are now considered authoritative for purposes of determining GAAP. Finally, the FASB issues staff positions, which provide interpretive guidance and also minor amendments to standards and interpretations. These staff positions have the same authority as standards and interpretations. The Board also has issued FASB Technical Bulletins, which provide timely guidance on selected issues; staff positions are now used in lieu of technical bulletins. Since replacing the APB, the FASB has issued over 160 standards, 48 interpretations, and over 50 staff positions.

Financial Accounting Concepts. As part of a long-range effort to move away from the problem-by-problem approach, the FASB in November 1978 issued the first in a series of Statements of Financial Accounting Concepts as part of its conceptual framework project. (See list at the back of the book.) The series sets forth fundamental objectives and concepts that the Board uses in developing future standards of financial accounting and reporting. The Board intends to form a cohesive set of interrelated concepts—a conceptual framework—that will serve as tools for solving existing and emerging problems in a consistent manner. Unlike a Statement of Financial Accounting Standards, a Statement of Financial Accounting Concepts does not establish GAAP. Concepts statements, however, pass through the same due process system (preliminary views, public hearing, exposure draft, etc.) as do standards statements.

Emerging Issues Task Force Statements. In 1984 the FASB created the Emerging Issues Task Force (EITF). The EITF is comprised of representatives from CPA firms and financial statement preparers. Observers from the SEC and AICPA also attend EITF meetings. The purpose of the task force is to reach a consensus on how to account for new and unusual financial transactions that may potentially create differing financial reporting practices. Examples include accounting for pension plan terminations, revenue from barter transactions by Internet companies, and excessive amounts paid to takeover specialists. The EITF also provided timely guidance for the reporting of the losses arising from the terrorist attacks on the World Trade Center on September 11, 2001.

We cannot overestimate the importance of the EITF. In one year, for example, the task force examined 61 emerging financial reporting issues and arrived at a consensus on approximately 75 percent of them. The FASB reviews and approves all EITF consensuses. And the SEC indicated that it will view consensus solutions as preferred accounting. Further, it requires persuasive justification for departing from them.

The EITF helps the FASB in many ways. For example, emerging issues often attract public attention. If not resolved quickly, they can lead to financial crises and scandal. They can also undercut public confidence in current reporting practices. The next step, possible governmental intervention, would threaten the continuance of standard-setting in the private sector. The EITF identifies controversial accounting problems as they arise. The EITF determines whether it can quickly resolve them, or whether to involve the FASB in solving them. In essence, it becomes a "problem filter" for the FASB. Thus, the FASB will hopefully work on more pervasive long-term problems, while the EITF deals with short-term emerging issues.

For several decades the AICPA provided leadership in developing accounting principles and rules. More than any other organization, it regulated the accounting profession, and developed and enforced accounting practice. When the FASB replaced the Accounting Principles Board, the AICPA established the Accounting Standards Executive Committee (AcSEC) as the committee authorized to speak for the AICPA in the area of financial accounting and reporting. It does so through various written communications:

The role of the AICPA in standard-setting has diminished. The FASB and the AICPA agree that the AICPA and AcSEC no longer will issue authoritative accounting guidance for public companies. Furthermore, while the AICPA has been the leader in developing auditing standards through its Auditing Standards Board, the Sarbanes-Oxley Act of 2002 requires the Public Company Accounting Oversight Board to oversee the development of auditing standards. The AICPA will continue to develop and grade the CPA examination, which is administered in all 50 states.

As might be expected, the documents that comprise GAAP vary in format, completeness, and structure. In some cases, these documents are inconsistent and difficult to interpret. As a result, financial statement preparers sometimes are not sure whether they have the right GAAP; determining what is authoritative and what is not becomes difficult.

In response to these concerns, the FASB developed the Financial Accounting Standards Board Accounting Standards Codification (or more simply, "the Codification"). The FASB's primary goal in developing the Codification is to provide in one place all the authoritative literature related to a particular topic. This will simplify user access to all authoritative U.S. generally accepted accounting principles. The Codification changes the way GAAP is documented, presented, and updated. It explains what GAAP is and eliminates nonessential information such as redundant document summaries, basis for conclusions sections, and historical content. In short, the Codification is a major restructuring of accounting and reporting standards. Its purpose is to integrate and synthesize existing GAAP—not to create new GAAP. It creates one level of GAAP, which is considered authoritative. All other accounting literature is considered nonauthoritative.^[7]

To provide easy access to this Codification, the FASB also developed the Financial Accounting Standards Board Codification Research System (CRS). CRS is an online real-time database that provides easy access to the Codification. The Codification and the related CRS provide a topically organized structure, subdivided into topic, subtopics, sections, and paragraphs, using a numerical index system.

For purposes of referencing authoritative GAAP material in this textbook, we will use the Codification framework. Here is an example of how the Codification framework is cited, using Receivables as the example. The purpose of the search shown below is to determine GAAP for accounting for loans and trade receivables not held for sale subsequent to initial measurement.

Illustration 1-5 shows the Codification framework graphically.

Figure 1-5. FASB Codification Framework

What happens if the Codification does not cover a certain type of transaction or event? In that case, other accounting literature should be considered, such as FASB Concept Statements, international financial reporting standards, and other professional literature. This will happen only rarely.

The expectations for the Codification are high. It is hoped that the Codification will enable users to better understand what GAAP is. As a result, the time to research accounting issues and the risk of noncompliance with GAAP will be reduced, sometimes substantially. In addition, the electronic web-based format will make updating easier, which will help users stay current with GAAP.^[8]

For individuals (like you) attempting to learn GAAP, the Codification will be invaluable. It is an outstanding effort by the profession to streamline and simplify how to determine what GAAP is, which will lead to better financial accounting and reporting. We provide references to the Codification throughout this textbook, using a numbering system. For example, a bracket with a number, such as [1], indicates that the citation to the FASB Codification can be found in the FASB Codification section at the end of the chapter (immediately before the assignment materials).

Should the accounting profession have principles-based standards or rules-based standards? Critics of the profession today say that over the past three decades, standard-setters have moved away from broad accounting principles aimed at ensuring that companies' financial statements are fairly presented.

Instead, these critics say, standard-setters have moved toward drafting voluminous rules that, if technically followed in "check-box" fashion, may shield auditors and companies from legal liability. That has resulted in companies creating complex capital structures that comply with GAAP but hide billions of dollars of debt and other obligations. To add fuel to the fire, the chief accountant of the enforcement division of the SEC recently noted, "One can violate SEC laws and still comply with GAAP."

In short, what he is saying is that it is not enough just to check the boxes. You have to exercise judgment in applying GAAP to achieve high-quality reporting.

Sources: Adapted from S. Liesman, "SEC Accounting Cop's Warning: Playing by the Rules May Not Head Off Fraud Issues," Wall Street Journal (February 12, 2002), p. C7. See also "Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accounting System," SEC (July 25, 2003).

User groups are possibly the most powerful force influencing the development of GAAP. User groups consist of those most interested in or affected by accounting rules. Like lobbyists in our state and national capitals, user groups play a significant role. GAAP is as much a product of political action as it is of careful logic or empirical findings. User groups may want particular economic events accounted for or reported in a particular way, and they fight hard to get what they want. They know that the most effective way to influence GAAP is to participate in the formulation of these rules or to try to influence or persuade the formulator of them.

These user groups often target the FASB, to pressure it to influence changes in the existing rules and the development of new ones.^[9] In fact, these pressures have been multiplying. Some influential groups demand that the accounting profession act more quickly and decisively to solve its problems. Other groups resist such action, preferring to implement change more slowly, if at all. Illustration 1-6 shows the various user groups that apply pressure.

Figure 1-6. User Groups that Influence the Formulation of Accounting Standards

Should there be politics in establishing GAAP for financial accounting and reporting? Why not? We have politics at home; at school; at the fraternity, sorority, and dormitory; at the office; at church, temple, and mosque. Politics is everywhere. GAAP is part of the real world, and it cannot escape politics and political pressures.

Investors generally ignore an accounting change, except when it substantially affects net income. Goodwill provides a good example. Under previous GAAP, companies with goodwill charged it to revenues over time. Under new rules, companies no longer have to write off this cost. The effect on the bottom line for some companies is substantial. For example, assuming no goodwill amortization, International Paper estimates an income increase of 21 percent, Johnson Controls 16 percent, and Pepsi Bottling Group 30 percent.

Some believe this change will increase their stock's attractiveness. Others argue that it should have no effect because the write-off is a mere bookkeeping charge. Still others argue that the change has no effect on cash flows, but that investors will perceive the company to be more profitable, and therefore a good buy in the marketplace. In short, the numbers have consequences. What do you think?

That is not to say that politics in establishing GAAP is a negative force. Considering the economic consequences^[10] of many accounting rules, special interest groups should vocalize their reactions to proposed rules. What the Board should not do is issue pronouncements that are primarily politically motivated. While paying attention to its constituencies, the Board should base GAAP on sound research and a conceptual framework that has its foundation in economic reality.

Accounting scandals at companies like Enron, Cendant, Sunbeam, Rite-Aid, Xerox, and WorldCom have attracted the attention of Congress. As a result, it enacted legislation—the Sarbanes-Oxley Act. This law increases the resources for the SEC to combat fraud and curb poor reporting practices.^[11] And the SEC has increased its policing efforts, approving new auditor independence rules and materiality guidelines for financial reporting. In addition, the Sarbanes-Oxley Act introduces sweeping changes to the institutional structure of the accounting profession. The following are some of the key provisions of the legislation.

International Insight

Foreign accounting firms that provide an audit report for a U.S.-listed company are subject to the authority of the accounting oversight board (mandated by the Sarbanes-Oxley Act).

In addition, Section 404 of the Sarbanes-Oxley Act requires public companies to attest to the effectiveness of their internal controls over financial reporting. Internal controls are a system of checks and balances designed to prevent and detect fraud and errors. Most companies have these systems in place, but many have never completely documented them. Companies are finding that it is a costly process but perhaps badly needed. Already intense examination of internal controls has found lingering problems in the way companies operate. Recently, 424 companies reported deficiencies in internal control.^[12] Many problems involved closing the books, revenue recognition deficiencies, reconciling accounts, or dealing with inventory. SunTrust Bank, for example, fired three officers after discovering errors in how the company calculates its allowance for bad debts. And Visteon, a car parts supplier, said it found problems recording and managing receivables from its largest customer, Ford Motor.

Will these changes be enough? The expectations gap—what the public thinks accountants should do and what accountants think they can do—is difficult to close. Due to the number of fraudulent reporting cases, some question whether the profession is doing enough. Although the profession can argue rightfully that accounting cannot be responsible for every financial catastrophe, it must continue to strive to meet the needs of society. However, efforts to meet these needs will become more costly to society. The development of a highly transparent, clear, and reliable system will require considerable resources.

A former Secretary of the Treasury, Lawrence Summers, indicated that the single most important innovation shaping the capital markets was the idea of generally accepted accounting principles. He went on to say that we need something similar internationally.

We believe that the Secretary is right. Relevant and reliable financial information is a necessity for viable capital markets. Unfortunately, companies outside the United States often prepare financial statements using standards different from U.S. GAAP. As a result, international companies such as Coca-Cola, Microsoft, and IBM have to develop financial information in different ways. Beyond the additional costs these companies incur, users of the financial statements often must understand at least two sets of GAAP. (Understanding one set is hard enough!) It is not surprising therefore that there is a growing demand for one set of high-quality international standards.

International Insight

iGAAP includes the standards, referred to as International Financial Reporting Standards (IFRS), developed by the IASB. The predecessor to the IASB issued International Accounting Standards (IAS). Both IFRS and IAS are considered iGAAP.

Presently, there are two sets of rules accepted for international use—U.S. GAAP and the International Financial Reporting Standards (IFRS), also known as iGAAP, issued by the London-based International Accounting Standards Board (IASB). U.S. companies that list overseas are still permitted to use U.S. GAAP, and foreign companies listed on U.S. exchanges are permitted to use iGAAP. As you will learn, there are many similarities between U.S. GAAP and iGAAP.

Already over 100 countries use iGAAP, and the European Union now requires all listed companies in Europe (over 7,000 companies) to use it. Recently the U.S. SEC proposed that it will allow some U.S. companies to adopt iGAAP as early as 2009. The SEC also laid out a roadmap by which all U.S. companies will be required to use iGAAP by 2016. Most parties recognize that global markets will best be served if only one set of GAAP is used. For example, the FASB and the IASB formalized their commitment to the convergence of U.S. GAAP and iGAAP by issuing a memorandum of understanding (often referred to as the Norwalk agreement). The two boards agreed to use their best efforts to:

International Insight

The adoption of iGAAP by U.S. companies would make it easier to compare U.S. and foreign companies, as well as for U.S. companies to raise capital in foreign markets.

As a result of this agreement, the two boards identified a number of short-term and long-term projects that would lead to convergence. For example, one short-term project was for the FASB to issue a rule that permits a fair value option for financial instruments. This rule was issued in 2007, and now the FASB and the IASB follow the same accounting in this area. Conversely, the IASB is presently working on a rule related to borrowing costs, in an effort to make it consistent with U.S. GAAP. Long-term convergence projects relate to such issues as revenue recognition, the conceptual framework, and research and development costs.

Because convergence is such an important issue, we provide throughout this textbook a summary page on international accounting called Convergence Corner. This feature will help you understand the changes that are taking place in the financial reporting area as we move to one set of international GAAP. In addition, throughout the textbook we provide in the margins International Insights to help you understand the international reporting environment. Also, Appendix 24B has an expanded discussion of international accounting.

Robert Sack, a noted commentator on the subject of accounting ethics, observed, "Based on my experience, new graduates tend to be idealistic ... thank goodness for that! Still it is very dangerous to think that your armor is all in place and say to yourself, 'I would have never given in to that.' The pressures don't explode on us; they build, and we often don't recognize them until they have us."

These observations are particularly appropriate for anyone entering the business world. In accounting, as in other areas of business, we frequently encounter ethical dilemmas. Some of these dilemmas are simple and easy to resolve. However, many are not, requiring difficult choices among allowable alternatives.

Companies that concentrate on "maximizing the bottom line," "facing the challenges of competition," and "stressing short-term results" place accountants in an environment of conflict and pressure. Basic questions such as, "Is this way of communicating financial information good or bad?" "Is it right or wrong? "What should I do in the circumstance?" cannot always be answered by simply adhering to GAAP or following the rules of the profession. Technical competence is not enough when encountering ethical decisions.

Doing the right thing is not always easy or obvious. The pressures "to bend the rules," "to play the game," "to just ignore it" can be considerable. For example, "Will my decision affect my job performance negatively?", "Will my superiors be upset?", "Will my colleagues be unhappy with me?" are often questions business people face in making a tough ethical decision. The decision is more difficult because there is no comprehensive ethical system to provide guidelines.

Time, job, client, personal, and peer pressures can complicate the process of ethical sensitivity and selection among alternatives. Throughout this textbook, we present ethical considerations to help sensitize you to the type of situations you may encounter in the performance of your professional responsibility.

Bob Herz, FASB chairman, believes that there are three fundamental considerations the FASB must keep in mind in its rule-making activities: (1) improvement in financial reporting, (2) simplification of the accounting literature and the rule-making process, and (3) international convergence. These are notable objectives, and the Board is making good progress on all three dimensions. Issues such as off-balance-sheet financing, measurement of fair values, enhanced criteria for revenue recognition, and stock option accounting are examples of where the Board has exerted leadership. Improvements in financial reporting should follow.

Also, the Board is making it easier to understand what GAAP is. GAAP has been contained in a number of different documents. The lack of a single source makes it difficult to access and understand generally accepted principles. As discussed earlier, the Codification now organizes existing GAAP by accounting topic regardless of its source (FASB Statements, APB Opinions, and so on). The codified standards are then considered to be GAAP and to be authoritative. All other literature will be considered nonauthoritative.

You will want to read the CONVERGENCE CORNER on page 20

For discussion of international convergence efforts and the reporting environment.

Finally, international convergence is underway. Some projects already are completed and differences eliminated. Many more are on the drawing board. It appears to be only a matter of time until we will have one set of global GAAP that will be established by the IASB. The profession has many challenges, but it has responded in a timely, comprehensive, and effective manner.

The IASB is a relatively new organization (formed in 2001). As a result, it has looked to the United States to determine the structure it should follow in establishing iGAAP. Thus, the standard-setting structure internationally is very similar to the standard-setting structure in the United States. Presented below is a chart of the international standard-setting structure.

Both the IASB and the FASB are hard at work developing standards that will lead to the elimination of major differences in the way certain transactions are accounted for and reported. In fact, the IASB has stated that no new major standards will become effective until 2009. The major reason for this policy is to provide companies time to translate and implement iGAAP into practice.

Much has happened in a very short period of time in the international accounting environment. It now appears likely that in a fairly short period of time, U.S. companies will be using iGAAP instead of GAAP in the United States.