FINANCIAL STATEMENT

ANALYSIS
Case Study 1-1, 1-2

Submitted by:
Vikram V - 18020848018
Case 1-1 Standard Setting: “A Political Aspect”

a. “Financial Statements must provide a neutral scorecard of the effects of

transactions”. Comment.
As these statements are the basic tools for the communication of
information to the market, investors, stakeholders, this information contained
in the financial statements should be free from bias and should provide a
neutral view of the transactions not favoring any of the parties. The reliability
on the statements refer to the trustworthiness of the company.
In order to show the company to be in limelight, there are chances that the
company reports increased performance and neglect the unfavorable events.
If such statements are present, then the investors, creditors, regulators and
other users of financial statements might not take the right decision both
business as well as economic. The market can only develop if the user is
confident enough to believe the financial statements produced. An efficiently
functioning economy requires credibility in the information provided. In order
to ensure this, a standard setting is needed for the neutrality of the financial
statements. Therefore the decision makers have the actual information and
the decision is not driven by the biases.

B. “Costs of transactions exist whether or not the FASB mandates their

recognition in financial statements”. Comment
Transparency is the extent to which investors have ready access to required
financial information about a company such as price levels, market depth and
audited financial reports. It could be the most valued principle of an
organization where the success and failures of a company can be disclosed and
further decsions can be made respectively. According to the concept of full
disclosure all the transactions should be disclosed in the financial statement to
give a clear picture about the company to its beneficiaries. The markets may
not be able to recognize these costs in the short run if they are not reported.
These transactions will have an impact on the company’s financial condition in
long run. Hence, the investors, regulators, and other beneficiaries of financial
reports may not be able to take the business and economic decisions if the
costs are not reported.

C. In the United States, standard setting is in the private sector. Comment.

It is extremely important that the accounting standard setting remains in
a private sector, and something that the United State government does not
take over.These standards do not just affect the companies who need to
follow them, but the public as well because it affects the economy. Most of the
standard setting in the United States is in the private sector. AICPA, the
American Institute of Certified Public Accountants played an important role in
the private sector. Since 1973 the primary role in the private sector has been
played by The FASB. According to the Securities Act of 1934 the SEC was given
the authority to determine the generally accepted accounting principles
(GAAP) and to regulate the accounting profession. The letter of Beresford
recognizes that the SEC and congressional committees maintain an active
oversight of the FASB to ensure that the interest of the public is safeguarded.

D. Few, if any, accounting standards are without some economic impact.

Comment
Accounting standards are vital to breaking down and understanding
information from private sector industries. Standards are created to ensure
financial information is accurate to guarantee decision makers create
knowledgeable judgements and can achieve their objectives. Yes, it is true that
there are economic standards which are without some Economic Impact. This
is revealed from the following Quote from the letter which is mentioned in the
case. It is said that there is always a chance of modification in the financial
reporting practices due to the economic environment.
Case 1-2 Politicization of accounting standards - a necessary act?

A. The emergency economic stabilization act of 2008 was passed during a

time of substantial stock market declines in the United States and the
world. In your opinion, was Congress correct in directing a review of an
accounting standard? Discuss
Congress had successfully explained and helped in understanding the
linkages between fair value accounting standards and usefulness of
information provided by financial institutions, however politicization and fair
value accounting might have an inverse relationship. Losing the transparency
or information in disclosing the reports results in more politically influenced
standards, while fair value accounting results in less Politicisation and it leads
to more reliable information because neutrality eliminates bias of any single
stakeholder. As a conclusion, when accounting standards are free from
political influence, they are more likely to benefit the company growth and
help in making further decisions.It would have been better if the review would
have been done by the SEC or the FASB independently because politicising of
accounting standards could lead to a worse scenario in future.

B. Did the SEC play a proper role in addressing the standards that governed
mark-to-market accounting? Discuss
The SEC's report on mark-to-market accounting disappointed fair value
opponents and reassured its defenders. They had declined to suspend the
application of FAS 157, concluding that most investors believe fair value
accounting increases financial reporting transparency. The SEC were successful
in identifying several areas in which improvements are needed, making
recommendations about changes that could be considered. Additionally, it
described that accounting standard setters play an important role in accessing
modifications to U.S. GAAP and international accounting standards.
C. Did the SEC have the authority to change mark-to-market accounting for
U.S. GAAP? Discuss.
The SEC had a unique position in the financial reporting process. The
committee had the power to enforce the accounting standards that was set.
They were on the frontline of financial reporting and were the first to identify
emerging issues and areas of accounting that need attention.

D. Did the FASB follow its usual procedures in addressing the mark-to-
market issue? Discuss.
In order to ensure the development of standard fair value accounting,
the staffs of FASB had modified several steps to enhance the existing
procedures that contribute to develop neutral and unbiased accounting
guidance.

E. Is Politicization of accounting standards justified under material economic

turmoil? Comment.
Yes, it is justified under material economic turmoil because the FASB
created an accounting process proposal excluding stakeholders from this deal.