Application of Generally Accepted Accounting Principles - Research Paper Example

? Emerging Accounting Issues The Financial Accounting Standards Board (FASB) is a non-profit and private organization that was formed in 1973 whose sole purpose was to develop generally accepted accounting principles (GAAP) in the United States. These principles are meant to be formulated to the best interests of the public in relation to the execution of accounting practices in public companies. The FASB recommended the formation of the Emerging Issues Task Force (EITF) in 1984. The EITF was tasked with assisting the FASB in improving financial reporting through discussion, timely identification and resolution of financial accounting issues. These issues are supposed to be in line with the FASB Accounting Standards Codification. This paper seeks to the highlight the role of EITF and its relationship with entrepreneurial entities in the US. Question #1 The EITF was designed to publicize the implementation guidance of sound accounting principles within the framework of the Accounting Standards Codification (ASC). This was meant to reduce diversity on a timely basis, and to minimize the need for the FASB to put effort and spend time in addressing narrow implementation, and application (Wahlen, Jones, & Pagach, 2012). The EITF was meant to create more space for the FASB to delegate on other issues while the EITF dealt with consistent emerging issues that can be analyzed within the GAAP. A common relationship that exists between the FASB and EITF apart from the fact that EITF was formed from the recommendations of the FASB is the EIFT members. Members of this agency are drawn from a cross section of the FASB work force in its various constituencies. These personnel include preparers, auditors and financial statement users. The EITF is designed to act as a taskforce that constitutes individuals with the ability to identify emerging issues before they manifest themselves as widespread divergent practices that become entrenched. This is to ensure that accounting principles and practices that do not serve the best interests of the public are not left unregulated. This gives the EITF mandate to institute regulatory measures and protocols that ensure a certain business entity adheres to standard practice. The responsibilities of the EITF are tandem with those of the FASB; in the sense that actions that cannot be accomplished by EITF are taken up by the FASB. EITF’s effectiveness in finding resolutions is pegged on its ability to identify emerging accounting and financial issues in a timely manner in order affect its regulatory role competently (Bragg, 2012). The agency’s resolution formulation is founded on the principles of consultative dialogue with the stakeholders and relevant professionals in the fields of financial accounting. To this end, EITF holds public meetings regularly to deliberate on new issues and receive input from proposals and recommendations it ought to make. As defined by its composition, the EIFT best practices, proposals and recommendations are viewed as the best for the benefit of the public good. Constitution of accountants from large accounting firms means that all the current trends in practice are cognizant with EITF’s responsibilities and functions. EITF achieves effective resolution of emerging issues by specifically developing answers and solutions to each emerging issue. This is because experienced observation has led to the conclusion that the development of an encompassing remedial strategy does not guarantee overall effectiveness. Best practice and resolution of emerging accounting issues individually has been cited as the best way EITF effectiveness and efficiency. Question #2 The EITF issue No. 13-C is concerned with the presentation of unrecognized tax benefit when a net operating loss carry-forward or tax credit carry-forward exists (Hyman, 2010). During the presentation of a statement of financial position, revelation of unrecognized tax benefits on income tax is not explicitly mandatory. There exist diverse practices when it comes to the revelation of unrecognized tax benefits, with some entities presenting these benefits as liabilities. The only instance when unrecognized tax benefits should be explicitly revealed is when they are directly associated with tax positions that result in the recognition of net operating loss carry-forward that have not been utilized (Hyman, 2010). EITF issue No. 13-C is meant to streamline the submission of tax returns by relevant public entities, and at the same time ensuring that representation of income tax is fiscal. The government and other related institutions offer financial incentives to business entities meant to encourage them to invest more into local and international industries as long as they have a local manifestation. The state’s initiative to invite private enterprises to venture into public enterprise is coupled with some compromises that have to be dealt with by the existing regulatory authorities. The role of EITF is tailor made to address the emerging issues that are caused by new entrants into their jurisdiction. The nature of business presented by new entrants to the market and the dynamics of existing market trends requires the EIFT to be vigilant with regard to emerging accounting issues. According to the requirements of issue No. 13-C, mandatory revelation of unrecognized tax benefits depends upon the recommendations of the EITF. New business entrants should state the conditions that qualify them into specific market practices. This enables the relevant regulatory agencies to determine their position in the market. Thus, it becomes extremely important for EITF to ensure that emerging and existing business entities remain relevant within the government’s taxation framework. Question #3 The Earned Income Tax Credit (EITC) is a reimbursable tax credit meant for medium and low-income couples and individuals with particular emphasis on those who have qualifying children application (Wahlen, Jones, & Pagach, 2012). This means that when this credit exceeds the tax owed it translates to a tax refund depending on the number of children. A company’s accounting and financial reporting is affected by the requirements of EITC. This is in the sense that a company has to submit each respondents or qualifiers tax exemptions in its income tax returns. This affects a company’s accounting and financial reporting in the sense that these tax cuts on the part of the qualifiers’ income is supposed to be reflected as an unrecognized tax income. This proves to be a challenge to a majority of firms because it affects their financial presentation privileges. The EITC policy only benefits a firm only when there is a positive carry-forward. Question #4 According to the EITF recommendations, all public entrepreneurial entities should adhere to tax principles that reflect the Accounting Standards Codification (ASC) standards. Presentation of income tax returns is meant to give business entities credibility and a sense of duty to their shareholders and stakeholders. This translates to the fact that business firms have a responsibility of submitting and presenting accurate income tax returns for the public good. The EITF’s functions reflect this endeavor and they are fashioned to facilitate the submission of accurate fiscal figures in light and interest of the public good. According to the EITF, public good means that the stakeholders accrue a value for their investment in terms of the vested interests. The ultimate goal of this entity is to provide a consistent approach that will facilitate the actualization of a broader objective of providing financial reports that offer effective and clear communication (Hyman, 2010). Question #5 The difference between GAAP and IFRS is determined by their various modes of application, but the major difference between the two is that IFRS is principle based while GAAP is rule based (Wahlen, Jones, & Pagach, 2012). Under IFRS, the technique used to assess treatment of accounting is more thorough while under GAAP the methodology used relies heavily on already established practices and evidence from literature. To overcome these differences, there are efforts being made to establish a set of universal accounting standards, which will characterize the convergence of these approaches. The principle-based framework is equipped with the potential to offer different interpretations of comparable transactions (Hyman, 2010). This creates room for extensive disclosure on financial statements despite the fact that standard setting boards can clarify unclear areas. A good example of this divergence in resolution approach is presented by consolidation, inventory and statement of income. These differences have led to the realization of a need to adhere or conform to an international financing reporting standard especially in the US. This has become critical when trans-state relations are involved in order to eliminate the bottlenecks created by differences between individual state GAAP and IFRS. Question #6 The adaptation of universal or international accounting standards is increasingly becoming a reality because of the prospects of globalization. This means that accounting principles have to be streamlined in order to facilitate the efficient coordination of commerce. Streamlining of global accounting standards represents an expected harmonization of the basic accounting practices across multiple financial disciplines. This prospect presents a new dimension into the operations that fall under the EITF’s mandate. Adaptation of a global set of n accounting standards will mean that EITF will have to change its tact in dealing with taxation practices. This is because entrepreneurial entities will be operating on a wider scope in terms of taxation laws and regulations. EITF will have to act in accordance with the new taxation guidelines that will represent international and global trade. Relevance and efficiency will depend on its adaptability and dynamism in light of the new fundamental accounting principles. References Bragg, S. M. (2012). Wiley GAAP 2012: Interpretation and Application of Generally Accepted Accounting Principles. 10th Edition. New York: John Wiley & Sons. Hyman, D. N. (2010). Public Finance: A Contemporary Application of Theory to Policy. London: Cengage Learning. Wahlen, J. M., Jones, J. P. & Pagach, D. P. (2012). Intermediate Accounting: Reporting and Analysis, 1st ed.: Reporting and Analysis. Illustrated Edition. London: Cengage Learning. Read More