Chapter

Overview of Accounting
Research
Each chapter in this book begins with an opening scenario, involving a beginning researcher who has been challenged to perform research. The opening scenario for this chapter is
about you.
You are a senior or graduate-level accounting student, or you are an associate in
an accounting firm. Your coursework and experiences to date have given you a strong
accounting foundation; however, now you are being asked to perform accounting research.
As an accounting student, you are told that youll need research skills for your upper-level
coursework and for the CPA exam. Or, as a professional, your supervisor is already asking
for your help researching client issues.
To perform this research, you will need the following:

An understanding of which research tools apply in each research environment,

Confidence applying a step-by-step research process to open-ended questions, and

Strong written communication skills, to effectively communicate your research

results.
Continued

Learning
Objectives

After reading this chapter and performing the exercises herein, you will be able to
1. Identify parties who perform accounting research, and circumstances in which
accounting research is required.
2. Describe the ideal timing for performing accounting research, and understand circumstances in which this timing may not be feasible.
3. Understand that different standards apply to different research environments (e.g.,
financial, governmental, audit, tax, and international research).
4. Identify key standard setters involved in establishing U.S. accounting guidance.

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Youve come to the right place to obtain these skills. By actively participating in the
lessons in this book, and by practicing your skills through research exercises and case
studies, you can become an effective researcher. Get ready to roll up your sleevesthe
ability to perform accounting research can pay dividends for your career, but mastering this
skill requires practice.

Why Do
Accounting Research
Skills Matter?

Sources of Guidance
Applicable to Different
Research Environments

Brief Introduction to
Accounting Standard
Setters

1. Why is accounting
research performed?

1. Accounting (public vs.

private companies)

1. SEC

2. In what future roles

might I perform
research?

2. International

3. FASB

3. When is research
performed?

2. AICPA

3. Governmental
4. Tax, and
5. Auditing research.

Organization of This Chapter

This chapter provides essential background information for researchers about to engage in
their first experiences with the FASB Codification (in Chapter 2). In particular, the chapter
emphasizes the importance of research skillscritical even for entry-level accountants
and then describes circumstances in which these skills may be required. Additionally, the
chapter emphasizes the benefits of researching transactions before they take place.
Next, the chapter highlights that accounting research doesnt just come from one
source; rather, each accounting environment (U.S., international, tax, governmental, and
auditing) is governed by its own unique standards. Finally, the chapter offers brief, but
essential, background on the key standard setters responsible for establishing U.S. generally accepted accounting principles (GAAP).
The preceding graphic illustrates the organization of this chapter.
Following the introduction to accounting research presented in this chapter, Chapters
2-8 of this book focus on various aspects of financial accounting research, primarily related
to U.S. public and nonpublic companies. Discussion of other research environments,
including guidance on auditing, governmental, tax, and international research, is provided
in Chapters 912. Chapter 13 offers techniques for delivering effective research presentations. Finally, Chapter 14 teaches readers the importance of staying current as accounting
standards continually change.
3

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Chapter 1 | Overview of Accounting Research

Why Accounting Research Skills Matter

LO1

Identify parties
who perform
accounting research, and circumstances in which accounting research is required.

Ever heard the one, where you tell someone youre an accounting major, and they say:
Oh, you must be good at math!?
Numbers certainly have a place in our profession. But Ill let you in on a little
secret...research and communication will also be a key part of your career as an
accountant. In fact, excelling in these areas can have a profound effect on your advancement. Consider this very rough sketch of research and your career:

Entry-level
accountant or
auditor

Manager/
Sr. Manager/
Partner

Corporate accounting
policy team/
Advisory services providers

Some research

More research

Research is a major focus of job

From this illustration, here are three takeaways:

One, theres no way around it. Youll need at least a minimum level of competency in
research to do your job as an entry-level accountant or auditor. This book will help.
Two, the more you advance in your career, the more research you will likely perform. But
the inverse is also true; do research well, and youll be asked to do more of it. Soon, youll
start being viewed as a higher-level professional, and youll have the ultimate learning experience as you are invited to participate in increasingly important projects.
Three, if you find that research is something you love, you can actually make a career of it.
Most major corporations have accounting policy teams, which focus on reviewing accounting judgments and implementing new standards. Accounting firms also have teams devoted
to assisting clients with accounting policy judgments, like KPMGs Accounting Advisory
Services and EYs Financial Accounting Advisory Services.

Youll learn the most about accounting research by actually doing it. So the next chapter
jumps right into the FASB Codification. But before we get there, this chapter offers a little background on who performs research in our profession, when, and in what environments. Finally,
the standard setters responsible for establishing accounting guidance are also briefly introduced.

What Is Accounting Research, and Why Is It Performed?

The term accounting research is used to describe two very different types of research:

Research done in practice, by accountants and other interested parties, often in conjunction
with the preparation or review of financial statements or tax returns; and
Academic research, primarily done by candidates pursuingor academics who have
obtaineda PhD in accounting.

This book focuses solely on the accounting research that is done in practice, also known as
technical accounting research.
The objectives of performing this type of accounting research are generally twofold:
1. To account for transactions or items in a manner that is appropriate and supportable based
on authoritative guidance, and

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Chapter 1 | Overview of Accounting Research

2. To create documentation describing the research performed and supporting the conclusion
reached.
That is, accountants often need to consult guidance requirements in order to determine the
appropriate accounting treatment for a transaction or event, or to locate guidelines for the preparation of financial statements. In particular, accounting research may be necessary for transactions that are new or infrequent for a company, highly material, or for which a company does not
have an established accounting practice. Ultimately, this accounting research can be necessary
to ensure that a companys accounting complies with authoritative guidance, thus allowing the
company to receive an unmodified (aka, unqualified) audit opinion.
Additionally, a key objective of accounting research is to create robust documentation supporting the conclusions reached. Proper accounting research documentation summarizesin
one placeall relevant background on an issue, the guidance considered, and the basis for the
selected accounting position. Documenting the basis for accounting positions is especially critical in circumstances where the accounting for a transaction involves judgment (for example, if
two or more alternatives are present). Chapter 4 offers additional discussion of why and how to
create robust documentation.
As noted earlier, accounting research is generally only performed for transactions and
events that are considered material to an entity and that are therefore relevant to users of an
entitys financial statements. Recall that:
Information is material [emphasis added] if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity.1

Materiality can be evaluated based on an items quantitative or qualitative significance.

More resources are generally devoted to researching an entitys most material business issues,
and less resources are generally devoted to less material issues.
Recognizing the importance of research skills, the uniform CPA exam tests candidates
research and other critical thinking skills through task-based simulations. Task-based simulations can account for between 40% and 50% of candidates exam scores on each of the
regulation (REG), auditing (AUD), and financial accounting (FAR) sections of the exam.2

[ TIP ]

from the
Trenches

Next, lets look at who typically performs accounting research.

In What Future Roles Might I Perform Accounting Research?

No matter what accounting career path you pursue, you can expect to perform accounting
research. In fact, you will likely be asked to research basic issues during your very first internship, or during your first year in the profession.
As illustrated in Figure 1-1, here are some circumstances in which the following parties
typically perform accounting research:

Corporate accountants: Also referred to as preparers of financial statements or tax returns,

accountants working for a company may perform accounting research in conjunction with
the preparation of the companys financial statements or tax returns, or for purposes of tax
planning.

1
FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting, Chapter 1 (September 2010).
Paragraph QC11.

AICPA, Content and Skill Specifications for the Uniform CPA Examination. Approved by the Board of Examiners
May 15, 2009 (with updates approved on October 3, 2013). Effective January 1, 2015. Page 35.

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Chapter 1 | Overview of Accounting Research

Particularly for small companies, accounting firm personnel are sometimes engaged to
help companies prepare their accounting records or financial statements. This can involve
performing accounting research on behalf of the company.
Auditors: Auditors often must research whether a companys accounting positions are supportable based on authoritative guidance, in order to conclude that the companys financial
statements are presented fairly in conformity with GAAP.
Regulators: Regulatory agencies (either governmental or independent) are responsible for
overseeing certain corporations and industries. Certain regulators, such as the SEC, routinely
review the financial statements of companies they oversee. Regulators may need to perform
research to understand positions taken in companies financial statements.
Investors: Often referred to as users of financial statements, professional investors monitor
accounting positions taken by companies and, in some cases, may raise concerns (or make
adjustments to models they maintain) when a companys accounting positions are inconsistent
with those of other companies in the same industry.

Figure 1-1

Parties Performing Accounting Research

Parties performing
accounting research

Investors

Corporate
Accountants

Regulators

Auditors
Attorneys

Before a
transaction
occurs

After company
documentation is
prepared

After financial
statements are
issued

Regardless of the career path you choose, during the early stages of your career, your
research will generally be reviewed by a supervisor before it is relied upon or shared with a
client. That said, a well-documented and supportable initial recommendation and research from
you can open doors to higher-level projects.

Now

YOU
Try
1.1

Your Role as a Researcher

Based on the preceding descriptions of parties who perform accounting research, in what role(s)
do you imagine that you might perform research?



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Chapter 1 | Overview of Accounting Research

When Is Accounting Research Performed?

Accounting research can occur at different stages in the financial reporting process.
Ideally, companies with sufficient resources (often, public companies) will research the
accounting for a transaction before the transaction takes place. However, the accounting
research process may differ for small or nonpublic companies, which may be subject
to more resource constraints and which generally have less user demand for financial
statements. In these environments, research may only occur as financial statements are
being prepared, or it may occur at the request of an auditor seeking further support for a
companys accounting methods.
Lets take a closer look at each of these circumstances now.

LO2

Describe the
ideal timing
for performing accounting
research, and understand circumstances in which this timing may not be feasible.

Researching a Proposed Transaction

Performing accounting research before a transaction occurs is beneficial for a few reasons. This
research allows

Company management to evaluate whether the expected financial statement impacts of the
transaction, as drafted, are acceptable.
Management to adjust forecasted earnings to reflect the expected impacts of the transaction.
The accounting team to prepare timely documentation of the expected accounting position.
The audit team to review the proposed accounting treatment before the transaction is
recorded.

Corporate management teams are frequently on the lookout for business opportunities that
are profitable and aligned with their companies strategic objectives. While management evaluates the merits of a potential transaction, the companys accounting team should be engaged
concurrently to evaluate the accounting implications of the transaction. Management will take
the expected financial statement impacts of the transaction into consideration when assessing
whether the transaction is worth pursuing.
Example
For example, assume that a company is closely monitoring its debt-to-equity ratio to remain
compliant with its current debt covenants (promises to lenders). Said another way, assume the
company has very little remaining debt capacity (ability to issue more debt under its current
debt covenants).
If the company needs to raise additional capital, it would likely evaluate potential
instruments to confirm that they would be accounted for as equity, not debt, before executing a
final agreement with a bank. The companys accounting department would be responsible for
researching the details of the capital issuance to determine whether the issuance would indeed
be accounted for as equity instead of debt.

In addition to being responsible for reporting past transactions and events, corporate managers are often held equally accountable for providing accurate short- and long-term earnings
forecasts. Investors rely on corporate earnings forecasts in setting a reasonable share price for
a companys stock, and lenders review forecasts to monitor compliance with debt covenants.
Accordingly, once management determines that a proposed transaction is worth pursuing, the
company must adjust its future earnings expectations to reflect the anticipated financial statement impacts of the transaction. The following Now YOU Try depicts an example in which
management asks the accounting team to evaluate the financial statement impacts of a proposed
transaction.

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Chapter 1 | Overview of Accounting Research

Figure 1-2

EXAMPLE

Reviewing the financial

statement impacts of a
proposed transaction

Were considering an
investment in a key supplier
through a stock-for-stock
exchange. How would this
transaction affect our financial
statements?

Management

Now

[ YOU ]
Try
1.2

Now YOU Try

Accounting
Team

Were considering
______________________________
______________________________.
How would this transaction
affect our financial statements?

Management

Accounting
Team

Fill in the box above by describing a transaction that management might need the accounting
team to review in advance, to evaluate potential financial statement impacts.

For their part, the accounting team must not only communicate the financial statement
impacts of a transaction to management, but they must also document the research supporting
their accounting conclusions. This documentation serves as support for the proposed accounting
treatment shared with management and is the preliminary support for the accounting position to
be reflected in the financial statements. This research should be saved in company files for future
reference and updated with final contracts if the transaction is executed.
Certain accounting elections must be documented at the time a transaction is executed. For
example, so-called contemporaneous documentation requirements apply to entities electing
hedge accounting for their derivative positions (this election typically reduces income
statement volatility).3 To comply with this requirement, companies usually review draft
transaction documents to evaluate whether the proposed instrument will meet all required
criteria for hedge accounting, then prepare draft documentation based on this review.

Finally, researching and documenting the planned accounting for a transaction allows a companys auditors to offer their tentative concurrence with the proposed treatment before a transaction is recorded. While the accounting remains the responsibility of management (and auditors
must take care to maintain their independence from management), it is often helpful for auditors
to review draft agreementsas well as managements documentation of an accounting issuein
order to perform their own independent research and offer a preliminary view of managements
position. Seeking this auditor buy in early in the process can minimize last-minute differences
of opinion that could arise at quarter- or year-end, when financial statements are being finalized.

Researching a Past Transaction

When it is not possible to research a transaction before its execution, accounting research may
be necessary at the time, or after, a transaction occurs. The purpose of this research is simply to
determine how to record the event in the financial statements, and to document this determination. Figure 1-3 illustrates a sample situation in which accountants must perform research related
to a past transaction.
3

Collins3e_ch01.indd 8

FASB Accounting Standards Codification 815-20-25-3 (Derivatives and Hedging - Hedging).

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Chapter 1 | Overview of Accounting Research

Bad news . . .a key customer just

declared bankruptcy, and our financial
statements (for the period just ending)
reflect a significant account receivable
due from this customer.

Operations
Team

Oh, no! Thanks for letting us know. Weve already

closed the books for this accounting period but
havent issued our financial statements yet. Let me
review the guidance on whether our financial
statements should be adjusted for this type of event.
In either event, well need to document the basis for
the decision we make.

Figure 1-3
Researching a past
transaction

Accounting
Team

Following are examples of circumstances in which research may be required at the time, or
after, a transaction is executed:

The transaction was time-sensitive; therefore, there was not sufficient lead time to research
its accounting treatment.
The transaction was highly confidential; therefore, details of the transaction were only
released to the accounting team after the transaction was executed.
The transaction or event could not have been anticipated; for example, the company suffered from a building fire or natural disaster.
Communication broke down between the dealmakers in the organization and the accounting
team; consequently, the accounting team was only informed of the transaction after it was
executed.
The preparer has limited resources and therefore only performs research at the time financial
statements are being prepared. For example, the company is a small or nonpublic company,
and management is not required to prepare earnings forecasts.
Finally, documentation (andas necessaryresearch) prepared previously, for proposed
transactions, should be updated to reflect final contract terms.

Take particular note of the fourth bullet above; a communications failure between a companys operations teams and accounting team should be reviewed to determine what went wrong.
To avoid a recurrence of the communications failure, a formal process in which material or
unusual contracts are reviewed by the accounting team may need to be established.
As with the process for researching proposed transactions, accounting research performed
for past transactions should be documented and shared with the companys audit team. This
documentation and review process will support the accounting positions reflected in the financial statements.
Imagine this scenario. You are an accounting manager at ABC Corp, a nonpublic company that
prepares GAAP financial statements in order to receive financing from banks.
The operations team at ABC is moving forward quickly on a deal to invest in a key supplier,
but has not yet informed the accounting team of this possible deal.
Make your best case: Convince the operations team that the accounting department should
be involved in reviewing the deal before it is executed.

Now

YOU
Try
1.3

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10

Chapter 1 | Overview of Accounting Research

Research Performed After Financial Statement Issuance

After financial statements have been issued, accounting research may be performed by various
parties, as follows:

Investors may research a companys choice of accounting methods and may seek to understand alternatives available in the literature. Using this information, investors may choose
to adjust their internal models to improve consistency across companies they are evaluating.
Regulators, such as the SEC or other industry-specific regulatory agencies, periodically
review the amounts and disclosures presented in the financial statements of companies they
oversee (see example in Figure 1-4). To assess whether companies accounting judgments
and disclosures are appropriate, regulators may perform research to familiarize themselves
with accounting requirements.
Attorneys may perform accounting research in order to argue (or to defend against claims)
that a companys financial reporting has harmed an investor or other interested party. The
attorney must support such arguments with citations from accounting guidance.

Questions from these parties may require corporate accountants to perform further research
to explain or defend their accounting positions taken. Robust, timely documentation of accounting positions (ideally, prepared before financial statement issuance) can assist corporate accountants in responding to such inquiries.
Figure 1-4
SEC inquiry regarding
valuation disclosures
presented in company
financial statements

Comment letter:
For your fair value measurements using unobservable inputs,
please tell us what valuation models you used to determine fair
values and provide the assumptions used in those models.

Securities and
Exchange
Commission
(SEC)

CFO

Research for the Purpose of Shaping Future Accounting Standards

Accounting standards are dynamic; that is, the current body of accounting guidance is continually being reviewed and revised. Many of the parties who perform accounting research also
participate in shaping future accounting standards. For example, the preparer who encounters
gray areas in GAAP may request clarification from the Financial Accounting Standards Board
(FASB). The investor who observes inconsistent disclosures may lobby the FASB for more
transparent disclosures in a given area.
For their part, accounting and auditing standard setters follow a due process that depends
heavily on input from their constituents. Chapter 14 introduces readers to the standard-setting
process and describes steps researchers can take to stay current.

In What Environments Is Accounting

ResearchPerformed?

LO3

Understand
that different
standards apply to different
research environments.

Collins3e_ch01.indd 10

Accounting research is performed in a variety of environments, including in public and

nonpublic companies (domestic and international), governments, and for purposes of
researching tax requirements.
Public companies (e.g., companies that issue publicly traded debt or equity securities)
are generally required to file financial statements with the SEC (Securities and Exchange
Commission). By contrast, nonpublic, or private, companies are generally not required to
file financial statements with the SEC; however, financial statements may be necessary to satisfy

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11

Chapter 1 | Overview of Accounting Research

lenders, venture capitalists, or other stakeholders. In both cases, research is frequently necessary to
ensure that the financial statements have been prepared in accordance with all applicable accounting standards.
Outside of the United States, accounting research is performed by public and nonpublic
companies, as required by their national laws to issue financial statements. Many non-U.S. countries prepare their financial statements in accordance with IFRS (International Financial Reporting Standards); other countries continue to follow country-specific financial reporting guidance.
Governmental entities, including state, local, and federal governments and agencies, are
frequently required to prepare financial statements to demonstrate how they have used the funds
allocated to them. Accountants involved in the preparation of governmental financial statements
must be able to research and understand requirements for their preparation.
Tax research is performed by (and for) corporations and other entities that consider the tax
consequences in planning transactions and that are required to report their activities to a government body (federal, state, and/or local). To understand tax reporting requirements, and to take
advantage of all available tax incentive programs, researchers must become familiar with tax
research sources ranging from the Internal Revenue Code to court decisions.

Different Guidance for Each Research Environment

Each research environment is subject to a different set of standards. Figure 1-5 identifies the rule
makers (or standard setters) for each research environment.
Preparer Type

Accounting Standard Setter

Audit Type

Auditing Standard Setter

Public companies

FASB and SEC

Audits of public
companies

PCAOB

Private companies

FASB*

Audits of private
companies

AICPA

Governmental entities
state and local

GASB (Governmental
Accounting Standards Board)

Audits of state and

local government
entities

GAO (Government
Accountability Office)

Governmental entities
federal

FASAB (Federal Accounting

Standards Advisory Board)

Audits of federal
government entities

International companies

IASB (International
Accounting Standards
Board), or other local
standard setter

Audits of
international
companies

Figure 1-5
Sources of accounting
and auditing guidance

GAO
IAASB (International
Auditing and Assurance
Standards Board), or other
local standard setter

*The Private Company Council advisory body advises the FASB on standard-setting activities affecting private companies.

Tax research, by contrast, requires researchers to consult multiple sources including the
Internal Revenue Code, tax regulations, IRS rulings and other guidance, and judicial rulings.
Sources of tax research guidance are listed in Figure 1-6; note that this list is not all-inclusive.
See Chapter 11 for a more complete discussion of tax sources.
Figure 1-6

Sources for Tax Research

Collins3e_ch01.indd 11

Statutory Sources

Internal Revenue Code

Other statutes with tax-related provisions (e.g., the
Bankruptcy Code)

Administrative Sources

Treasury regulations
IRS Revenue Rulings
Written administrative agency determinations

Judicial Sources

U.S. Supreme Court

U.S. Court of Appeals
U.S. District Court
U.S. Court of Federal Claims
U.S. Tax Court

Sources of tax research

guidance

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12

Chapter 1 | Overview of Accounting Research

[ ]
TIP

This book will introduce you to each of the preceding research environments and standard
setters. However, in practice, you will likely specialize in only one or two of these areas. For
example, public company accountants and auditors will primarily perform research using
FASB guidance for accounting, and PCAOB guidance for auditing.

from the
Trenches

Now

[ YOU ]
Try
1.4

In Figures 1-5 and 1-6, put a check mark next to any standard setters whose guidance you have
researched, such as in previous accounting or auditing coursework. Then put an open circle next
to other standard setters you expect to learn about in this course.

Following is an introduction to key U.S. accounting standard setters, which will set the stage
for the accounting research topics discussed in Chapters 28. The standard setters responsible
for creating auditing, governmental, tax, and international accounting guidance are introduced
in Chapters 912.

Accounting Standard-Setting Bodies

LO4

The next several chapters of this book (Chapters 28) provide in-depth coverage of
the guidance and research process involved in performing U.S. accounting research. In
preparation for these chapters, following is a brief history ofand introduction tothe
standard-setting bodies primarily responsible for establishing U.S. accounting guidance.
Having a basic familiarity with these standard setters provides context for understanding
the accounting guidance applicable today.
This history follows a chronological order, beginning with the SECthe first entity given
formal authority to establish U.S. accounting standards. Figure 1-7 illustrates a timeline of key
U.S. accounting standard setters.

Identify key
standard setters
involved in establishing U.S.
accounting guidance.

Figure 1-7

Standard-setting bodies and primary guidance issued

Brief timeline of key

U.S. accounting
standard setters

SEC: Given
statutory authority
to set accounting
standards. Has
elected to delegate
this authority,
as follows:
1934 Act

Committee on
Accounting
Procedure (CAP)*

Accounting Principles
Board (APB)*

Financial Accounting
Standards Board
(FASB)

APB Opinions

FASB Statements

Issued
Accounting
Research Bulletins
1939

1962

1973

FASB
Codification
established

2009

Today, the
FASB
Codification
is the primary
source of
authoritative
GAAP for
nongovernmental
entities.

* A committee formed by the AICPA

The Securities and Exchange Commission

Following a crisis in investor confidence resulting from the stock market crash of 1929 and
subsequent Great Depression, the Securities Exchange Act of 1934 (the 1934 Act) created
the SEC with the objective of providing investors with reliable financial information about public companies. First and foremost, the SECs role is to act as a law enforcement agency, tasked
with the authority to enforce securities laws in order to protect the investing public. The SEC
describes the work of its Division of Enforcement, in part, as follows:
Each year the SEC brings hundreds of civil enforcement actions against individuals and
companies for violation of the securities laws. Typical infractions include insider trading,
accounting fraud, and providing false or misleading information about securities and the
companies that issue them.4
4

Collins3e_ch01.indd 12

www.sec.gov, About - What We Do. Accessed April 22, 2015.

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13

Chapter 1 | Overview of Accounting Research

A second authority granted to the SEC in the 1934 Act was the authority to establish accounting standards. The SEC elected to delegate this responsibilityfirst to the AICPA (American Institute of Certified Public Accountants) and later to the FASB. (Notably, the Sarbanes-Oxley Act of
2002 established criteriasuch as funding and independence requirementsrelated to the SECs
choice of standard setter.) The FASB website describes its relationship to the SEC as follows:
The SEC has statutory authority to establish financial accounting and reporting standards
for publicly held companies under the Securities Exchange Act of 1934. Throughout its
history, however, the Commissions policy has been to rely on the private sector for this
function to the extent that the private sector demonstrates ability to fulfill the responsibility
in the public interest.5

As noted, the SEC relies on the private sector to

establish accounting guidance, on condition that the
private sector demonstrates its ability to fulfill this
responsibility. Accordingly, the SEC closely monitors
the FASBs agenda and routinely provides input on
tentative decisions reached by the FASB.
That said, the SEC does periodically issue accounting guidance applicable primarily to public companies.
For example, the SEC establishes public company
financial statement and disclosure requirements through
Mary Jo White,
its Regulations S-X and S-K. The SEC also periodicalChairman since 2013
ly issues interpretive guidance on topics of key interest
(former prosecutor)
to the SEC, in the form of Staff Accounting Bulletins
The SEC chairman is appointed by the
(SABs) and Financial Reporting Releases (FRRs).
President, with the advice and consent of
the senate.
Finally, it is worth noting that the SECs Division
of Corporation Finance reviews, at least every three
years, the financial statements and disclosures of all companies with publicly traded securities.6
These reviews can result in comment letters to corporations requesting additional explanation
of a companys financial reporting. In some cases, unsatisfactory responses to comment letters,
for material matters, can result in the SEC requesting that a company restate previously issued
financial statements. Chapter 5, on nonauthoritative sources, describes how researchers can use
the SEC website to search for company filings and SEC correspondence.
The SEC is headed by five commissioners, each appointed by the President of the United
States, and each serving a five-year term. The President designates one of the commissioners to
serve as Chairman of the SEC. Current SEC Chairman, Mary Jo White, is shown in Figure 1-8.

1. Which of the SECs rolesas enforcement agency or as accounting standard setterare

you more familiar with? Give an example of prior exposure youve had to the SEC in one or
both of these capacities.

Figure 1-8
SEC Chairman, Mary Jo
White

Now

YOU
Try
1.5

2. In your own words, explain the SECs relationship to the FASB.

www.fasb.org, Facts about FASB. Accessed April 22, 2015.

Sarbanes-Oxley Act of 2002, Sec. 408(c). Also known as Public Law 107-204. July 30, 2002.

Collins3e_ch01.indd 13

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14

Chapter 1 | Overview of Accounting Research

The American Institute of Certified Public Accountants

As noted, the SEC first delegated its accounting standard-setting authority to the AICPA.7 In
1936, the AICPA formed the Committee on Accounting Procedure (CAP) which, at the urging
of the SEC, began actively issuing guidance in 1939. In 1959, facing criticism of the CAPs ad
hoc approach to setting standards and the tendency for its standards to allow preparers to choose
between two acceptable accounting treatments, the AICPA replaced this committee with the
Accounting Principles Board (APB).
The membership of both the CAP and APB consisted of volunteers who also maintained
full-time positions with other employers. These early standard setters were criticized for their
lack of independence, their slow response time to emerging issues, and for their failure to
develop a conceptual framework to guide their decisions. The APB was dissolved in 1973 and
was replaced by the FASB. Still today, a portion of the guidance issued by the CAP and the APB
continues to be in effect within the FASBs Accounting Standards Codification.
Upon the dissolution of the APB, the AICPA formed an accounting standards committee to
continue its participation in, and influence over, standard setting. In the years that followed, this
committee issued guidance including AICPA Statements of Position (SOPs), industry-specific
Audit and Accounting Guides (A&A Guides), and Practice Bulletins, some of which is still part
of the body of GAAP today.
While the AICPA no longer issues standards that are considered GAAP, the AICPA has
recently worked to create guidance for entities that are not required to issue GAAP financial
statements. In 2013, the AICPA introduced the Financial Reporting Framework for Small- and
Medium-Sized Entities (FRF for SMEs), a non-GAAP reporting framework intended to simplify
financial statement preparation for smaller entities.
Additionally, today the AICPA remains a key authority in establishing standards for professional services (such as auditing) and for accountants professional conduct. These standards are
discussed further in Chapter 9.
Now

[ YOU ]
Try
1.6

One criticism raised regarding the AICPAs two standard-setting committees is that they were
not independent. Based on the preceding discussion, explain the characteristics of these
Boards that might have caused this criticism. Why should we care whether an accounting standard setter is independent?

The Financial Accounting Standards Board

Note to
Instructors:
You may choose to cover
the standard-setters due
process at this point (see
Chapter 14).

Collins3e_ch01.indd 14

The FASB was created in 1973, following the dissolution of the APB. The FASB is an independent organization focused on developing standards that result in decision-useful information for
investors and other financial statement users. Both the SEC and the AICPA recognize the FASB
as the entity with authority to set accounting standards for nongovernmental entities. To that end,
the FASB developed and maintains the FASB Accounting Standards Codification, described in
detail in the next chapter.
The FASBs seven full-time board members are required to represent a diversity of
backgrounds. Specifically, board members must collectively have knowledge and experience in investing, accounting, finance, business, accounting education, and research.8 These
7

Founded in 1887, the AICPA is the professional association for CPAs in the United States.

FASB Rules of Procedure, amended and restated through December 11, 2013. Page 8.

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Chapter 1 | Overview of Accounting Research

board members are appointed by the

FASBs parent organization, the Financial
Accounting Foundation (FAF). The FAF
oversees the operations of the FASB; its
objective, in part, is to protect the independence and integrity of the standardsetting process.9 Figure 1-9 depicts the
current Chairman of the FASB, Russell G.
Golden, who was appointed in 2013.

Russell G. Golden,
FASB Chairman since 2013
(former partner, Deloitte &
Touche LLP)

Preparer:

Academic:

Investor:
Auditor:

Figure 1-9
FASB Chairman, Russell
Golden

The FASB Chairman is

appointed to a five-year term
by the trustees of the Financial
Accounting Foundation.
Image used with permission of the
Financial Accounting Foundation.

The FASBs board typically includes representation from the preparer, academic, investor, and
auditor communities. That is, board members typically come from a mix of these backgrounds.
What perspectives might each of these parties bring to the standard-setting process?

15

Now

[ YOU ]
Try
1.7

As required by the Sarbanes-Oxley Act, the FASBs annual operating costs are primarily
funded by accounting support fees assessed to public companies. Companies pay a share of
this fee based on the size of their market capitalization (that is, the market value of a companys
outstanding shares). This funding mechanism is designed to maintain the FASBs independence;
that is, rather than rely on donations that could impair the Boards objectivity, public companies
are required to participate in supporting the FASBs operations.
In response to criticism that compliance with GAAP is too burdensome for nonpublic companies, in 2012 the FAF created the Private Company Council (PCC). This Council identifies
areas within existing and proposed GAAP that can be simplified for private companies, and these
efforts have given rise to simplified accounting alternatives being made available to private
companies.
The standard setters responsible for establishing auditing, tax, international, and governmental
accounting standards will be introduced in Chapters 912 of this book. For now, understanding
the roles of these three U.S. accounting standard setters will provide the foundation for your next
challenge: learning to perform great accounting research.

1. Explain how levying the accounting support fee, as opposed (for example) to relying upon
individual corporate donations, helps maintain the FASBs independence.

Now

[ YOU ]
Try
1.8

2. Considering the preceding introduction to accounting standard setters, which entity would
you expect to have authority to adopt IFRS as the applicable reporting standards in the
United States? Explain.

Collins3e_ch01.indd 15

FASB Rules of Procedure, amended and restated through December 11, 2013. Page 6.

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Chapter 1 | Overview of Accounting Research

3. Contrast the role of the AICPAs FRF for SMEs with the role of the FASBs Private Company
Council.

Chapter Summary
This chapter emphasized that research and communication will play a role in your career as an accountant.
Indeed, accounting research is integral to the work of many corporate accountants, auditors, investors, and
regulators, as this chapter discussed.
Accounting research is ideally performed before transactions take place; however, this is not always
feasible given resource constraints. Sources of research vary based on the diverse research environments
(accounting, governmental, audit, tax, and international); its important for practitioners to understand
which standard setter has authority before beginning research.
Finally, this chapter introduced the organizations historically responsible for setting U.S. GAAP, and
which contributed to the expansive population of accounting guidance available today. In the next chapter,
well discuss the FASB Codification, which brings together these many diverse sources of guidance.

Review Questions
1. What are two key objectives of performing technical accounting research?
2. Identify four parties who typically perform accounting research and explain why they perform
research.
3. Name three reasons for which accounting research should ideally be performed before a transaction is
executed.
4. Name three circumstances in which it might not be possible to research the accounting for a transaction until after it has occurred.
5. What is the meaning of the term contemporaneous? Explain.
6. Differentiate between the requirements for public (versus nonpublic) companies to prepare financial
statements, and state whyin both casesaccounting research is frequently necessary.
7. To what research environment do the following standards apply?
a. Standards of the GASB
b. Standards of the FASB
c. Standards of the AICPA
d. Standards of the IASB
e. Standards of the FASAB
8. List the organizations, in chronological order, that have historically been responsible for setting
accounting standards.
9. What legislation gave the SEC the authority to set accounting standards? What was happening at the
time that led to this need for accounting standards?
10. What two committees did the AICPA form, which were at one point responsible for setting accounting standards? And, what were some of the criticisms raised regarding these first two standard-setting
bodies?
11. Define accounting support fees and explain why these fees help the FASB maintain its independence.
12. Fill in the blanks: The SEC has _______________ authority to establish accounting standards but has
historically delegated this authority to the _______________ sector. Then, explain this statement.
13. What does the SEC view as its most important role? Explain.
14. What is an SEC comment letter? Explain.
15. Why was the PCC formed, and what impact has it had on accounting standards?

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Chapter 1 | Overview of Accounting Research

17

Exercises
1. Go to marketwatch.com, a Dow Jones & Co. site. Look for the magnifying glass symbol (at top right of blue
banner at top of page), click it, then type the stock symbol AAPL into the search bar that appears. Next, click
on the tab for Analyst Estimates.
a. What is the mean earnings per share estimate for this quarter? (Indicate what date your information is as
ofi.e., the date on which you performed this search.)
b. What is the mean EPS estimate for the next fiscal year? (Indicate what date your information is as of.)
c. Explain why performing accounting research before a transaction occurs might be important to Apples
management.
2. Go to wsj.com and type Accounting Method into the search bar. (Again, look for the magnifying glass at top
right of the page to access the search bar.) Summarize one of the headlines and issues discussed in the search
results. Brainstorm (and explain) why readers of the Wall Street Journal might have an interest in this article.
3. Go to fasb.org and locate (under Latest News on the bottom left side of the homepage) a recent news release.
Describe the subject matter of the news release then identify two parties (such as parties depicted in Figure 1-1)
who would be interested in this issue. Be as specific as possible, describing why the parties might be monitoring
this issue.
4. Go to fasb.org and look up pre-Codification standards (located under the tab Reference Library, then Superseded
Standards). Identify and summarize the subject of one standard issued by the CAP and one issued by the APB.
What is the current status of these standards?
5. Look up the website for EYs Financial Accounting Advisory Services (FAAS) practice. Explain how experience
performing accounting research could prepare you for a career in this practice.
6. Brainstorm an example of: 1) a financial accounting issue that would be researched before a transaction is finalized, 2) an accounting issue that would be researched after a transaction has been executed, and 3) an accounting
issue that would be researched following financial statement issuance.
7. The chapter states that a communications failure between a companys accounting team and operations teams
could result in company accountants evaluating the accounting for a transaction after it has occurred. Brainstorm
a process that companies could put in place to encourage the timely communication of proposed transactions.
8. The SEC has five divisions. Using www.sec.gov as a starting point, name these five divisions. Which division
would you expect to issue guidance to companies for complying with SEC reporting requirements?
9. Using sec.gov, go to Regulations then Staff Interpretations. Locate Staff Accounting Bulletin No. 99 (SAB 99)
and summarize the issue addressed by this guidance.
10. Using www.sec.gov, go to Divisions, then Division of Corporate Finance. Under Statutes, Rules, and Forms,
go to Rules then to Regulation S-K. Under Item 303 (Managements Discussion and Analysis) of Regulation
S-K, list the five items (items 303(a)(1-5)) that must be included in a public companys MD&A disclosures.
11. Refer to the previous question. Describe two parties who might perform research to understand the MD&A
requirements in Regulation S-K, and the circumstances that might drive them to perform this research.
12. Go to sec.gov, then Divisions, then Division of Enforcement. Under Federal Court Actions, locate the June 18,
2015, enforcement action brought against Norstra Energy. Summarize the charges brought by the SEC against
Norstra. Describe how this enforcement action fits with the SECs mission.
13. Search for information from the AICPA about its new FRF for SMEs. State again what the purpose of this framework is, and how it compares to the FASBs authoritative Codification. What entities are expected to benefit
from application of this framework?

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18

Chapter 1 | Overview of Accounting Research

Case Study Questions

1.1

Purposeful reading: The 3-2-1 Assignment10 Complete the following steps intended to enhance your understanding of the chapter reading, and document your responses.
3: Read the chapter, then describe what you feel are the three most important concepts or facts from the
reading.
2: Describe two aspects of the reading that you dont fully understand, or which are somewhat confusing.
1: Pose one question to the author (this should differ from the areas of confusion described in (2) above),
which goes beyond the reading content, such as inquiring about implications or applications of the reading.

1.2

Relationship Between the FASB and SEC The relationship between the FASB and the SEC has been dynamic over
time. Given that the SEC is a government agency, and that it has delegated its standard-setting power to the FASB,
the SEC has periodically been lobbied by both lawmakers and corporations who have disagreed with FASB decisions.
Using an Internet search engine such as Google, locate one article involving both the FASB and SEC; the article does
not have to be current. In approximately one page summarize the issue raised in the article and the interplay you
observe between these two organizations in the article.
Variation, Case 1.2(Alt.): See the instructions to Case 1.2 above; rather than documenting your observations
about the interplay between these organizations, come to class prepared to describe your article and to discuss your
observations to your fellow classmates. In this Case 1.2(Alt), you are not being asked to submit any documentation
of your findings.

1.3

Researching Original FASB Standards Using the FASB website, locate the original (superseded) standard FASB
Statement No. 5, Accounting for Contingencies (as amended). In approximately one paragraph, describe when
accrual of a loss contingency is required by this standard, and cite the FASB standard and paragraph number that
provides this guidance. State also which disclosures must accompany loss contingency accruals. Finally, considering
the background of this project described in Appendix B, was there uniform guidance for contingency accounting
available prior to this standard? What committees or agencies, at that time, participated in establishing accounting
guidance? Explain.

1.4

Parties Performing Accounting Research (FASB Comment Letters) In May 2013, the FASB issued a proposed
Accounting Standards Update on Leases (Topic 842) and solicited constituent feedback. The proposed guidance
would require most leases to be recorded on the balance sheet, with estimates of certain variable lease payments to
be updated each period. In this case study, you are being asked to review two comment letters related to this proposal
and to consider the perspective of each commenter.
To begin, go to fasb.org then navigate to Projects, then Comment Letters. Click on the link for Leases (Topic 842)
May 2013, then locate Comment Letter No. 42, from Johnson & Johnson (J&J). Read this comment letter, then
respond to the following:
1. What would you describe as J&Js primary concern related to the proposed guidance? From what perspective
are they raising this concern (e.g., financial statement user, preparer, etc.)?
2. What steps does it appear J&J has already taken to evaluate or prepare for the proposed standard? Explain.
3. Describe one of J&Js recommendations to the FASB, regarding ways to reduce the cost/effort involved in
complying with revised guidance. Explain J&Js rationale for this specific recommendation.
Next, locate Comment Letter No. 44, from the American Bankers Association (ABA), then respond to the following:
4. From what perspective(s) is the ABA writing this letter? To respond, refer to page 1 of the letter.
5. Flip to pages 5-6 of the letter. What are some of the concerns the ABA raises from a user perspective, related to
the proposed standard?
6. Flip to page 9 of the comment letterwhat recommendation does the ABA make to the FASB?
7. Finally, contrast the perspectives that these particular users and preparers brought to this issue, and describe how
you might expect the FASB to respond to the concerns raised by these letters.

1.5

Understanding How FAS 168 Established the Codification as GAAP Using the FASB website, locate the original
(superseded standard) FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles (as amended) then respond to the following. Include paragraph numbers
to support your responses.

10
Geraldine Van Gyn, PhD. Its The Little Assignment with the Big Impact: Reading, Writing, Critical Reflection, and Meaningful
Discussion. Faculty Focus.com, May 6, 2013.

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Chapter 1 | Overview of Accounting Research

19

1. Read the Summary of this standard, which begins on page FAS168-1. Based on this Summary, describe the
purpose of this standard and the key changes effected by this standard.
2. Summarize par. 3, Objective. In doing so, also comment on the role of SEC guidance in the Codification (this
is also described in par. 3).
3. Describe the GAAP hierarchy introduced by Statement 168. Use information within the standard to respond.
4. What are some examples, provided in Statement 168, of nonauthoritative sources of guidance? Use information
within the standard to respond.
5. In Appendix A (Background Information and Basis for Conclusions) of this standard, locate the discussion of
why the FASB Codification was introduced. That is, what was the issue the Codification attempts to resolve?
6. Using Appendix B (Amendments to the FASB Codification) of this standard, describe where in the Codification
a user can find the principles established by FAS 168. That is, in which topic will the principles of FAS 168 be
described?
Networking with a Professional, and Understanding the Role of Research in His or Her Work Contact a professional in your planned or chosen field (auditing, tax, systems, internal audit, etc.). While you might set up the meeting
via email, make every effort to have this conversation live (in person, or on the phone). Ask for just 10 minutes of
their time, and be mindful to not exceed this time limit.
Ask the professional what role research plays in their current job responsibilities, and ask what resources they
refer to most often in order to perform this research (e.g., the Codification? Firm audit program? Tax research database? Daily news updates?). Finally, ask what advice they would offer a beginning researcher.
Once youve asked your questions, let the professional do most of the talking; practice your listening skills during the conversation. Summarize the professionals responsesincluding his or her name and organization, and the
setting for your conversationin 13 paragraphs (less than one page). Be prepared to discuss your findings during
class.

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1.6

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