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First, it is necessary to mention that the Financial Accounting Standards Advisory Council (FASAC) recently released the results of its 2008 survey that addressed the areas of the business sphere. It is stated that close to thirty Council members, seven FASB participators responded to the questions and research matters of the survey. Originally, these answers helped the FASAC arrange the classification of the business corporations and provide the criteria of business success, profitability, financial performance, and conceptual framework of the organization.
Facts of the case
As for the facts, which the survey and research, in general, helped to reveal, these are closely related to the principles of financial performance and the rules of participation on the market from the perspective of the conceptual framework of profitability. Thus, the top priorities of the company appeared to be the following:
- Fair value
- Reporting financial performance
- Stock-based compensation
- Pensions for the retired employees
From this point of view, it is necessary to mention that according to Edwards (2007) “Fair value is generally regarded as a significant measure and economic factor that company executives and other stakeholders could apply in assessing risk. It is often mentioned that a basic framework for establishing fair value is required, as was further guidance for determining that value. It is also emphasized that fair value information needed to be relevant and that stockholders, regulators, and other stakeholders should understand how that value was determined.” Consequently, it is necessary to mention that the factor of reporting financial performance is one of the most crucial and significant after the fair value factor. It is stated that reporting financial performance is the defining measure of fair play on the market and helps to evaluate the competitive capacity of the organization.
The research questions of the survey included the measure of fair evaluation of the capacities of the organization, the required period for the evaluation, and the necessary measure of defining the retirement plan effectiveness (for estimation of the stock-based compensation plan).
In stating and evaluating the importance of reporting financial performance, it is generally mentioned in researches (Solomons, 2007) that creditors and investors require sufficient data for proper calculation and estimation of the central financial measures. The companies, which participated in the survey called for a more widespread framework that would evaluate the issues of the “earnings per share” as this structure permits investors and others to make more informed decisions, taking into account the company’s performance.
Applicable GAAP to the case
As for the GAAP rules, and the application of the case, it is necessary to mention that FASB generally requires the advisory council’s opinion for this matter. Kelly (2008) states the following on this matter: “Revenue recognition and lease accounting are designated as major standards projects being developed jointly with GAAP. In general, the revenue recognition proposal is aimed at establishing a single, comprehensive standard that would eradicate inconsistencies and fill voids in existing guidance, while being careful not to create future inconsistencies.” Financial and management accounting generally requires the implementation of high-level and high proficiency measures for the evaluation of the general financial performance of the organization. The advisory council performs the task of evaluating the financial performance and applying it to the principles and rules of GAAP.
As for the issues of analysis of the case, it is necessary to mention that the GAAP requirement to take into account the issues of the industry-specific research problems extracted a diverse range of responses. The technology, petroleum, banking, insurance, pharmaceutical, oil, and utility industries were regarded here as having issues that required particular attention in the analyzed spheres. (Kelly, 2008) Originally, some respondents stated that experts for those different industries work with the GAAP to ensure that any overall economic reporting or accounting rules would recognize industry-specific matters.
From the point of view of the GAAP rules, it should be stated that Solomons (2007) in his research emphasized the following fact: “the company siphoned off precious capital generated from its strong core charge card franchise. Originally, this franchise was into insurance companies and other financial services that cost shareholders big in the way of opportunity costs – the money would have been much better spent had it been used to repurchase shares or paid out as cash dividends.”
Finally, it is necessary to mention that the analysis of the organization in the FASB survey from the point of view of GAAP rules is a task that requires high qualification and proficiency. Nevertheless, the fact that the company incorporates the principles of fair value signifies that all the rules of GAAP are observed.
Edwards, J. D., & Heagy, C. D. (2007). Relevance Gained: FASB Modifies Cash Flow Statement Requirements for Banks. Journal of Accountancy, 171(6), 79.
Kelly, K. S. (2008). Effective Fund-Raising Management. Mahwah, NJ: Lawrence Erlbaum Associates.
Solomons, D. (2007). Making Accounting Policy: The Quest for Credibility in Financial Reporting. New York: Oxford US.