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Governance

Governance

Author: Evan McLaughlin
Description:
In this lesson, the student will learn about governing principles and the range of governing bodies involved in regulating accounting practices.
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Tutorial

"Governance"

Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792, Image of SEC seal, Public Domain, http://en.wikipedia.org/wiki/File:US-SecuritiesAndExchangeCommission-Seal.svg, Image of GAO logo, Public Domain, http://en.wikipedia.org/wiki/File:US-GovernmentAccountabilityOffice-Logo.svg, Image of IRS logo, Public Domain, http://en.wikipedia.org/wiki/File:IRS.svg

Video Transcription

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Hey, everyone. Welcome to today's video on governance. So what are we going to talk about today? We're going to talk about governing principles in accounting. We're going to talk about GAAP and IFRS, what are they, and what are the differences between them.

We're going to talk about some of the governing bodies that play a role in this standard in principle setting process. We're also going to look at some federal agencies that also have their hand in this process. But first let's talk about these governing principles, starting with GAAP.

GAAP. What is it? It stands for generally accepted accounting principles. And it's accounting standards for US companies. Publicly traded US companies are required to use US GAAP. But many privately held companies, although not required, still use it.

Now what's the objective? What are the objectives of GAAP? Well, it really helps financial statements achieve three things-- relevance, reliability, as well as comparability. Can we rely on the information? Is it relevant to what message we're trying to send through our financial statements? And can we compare the financial statements of two different entities?

So there's also IFRS. What's IFRS? IFRS is International Financial Reporting Standards, and these are accounting standards for all international companies. So all countries outside of the US, if you're doing business there, you use IFRS. Now what's the objective of IFRS? The objective is really to standardize the accounting procedures across all nations.

Now the US has tried to get involved somewhat, although we have US GAAP here in the United States that, again, all publicly traded US companies must use. Any non-publicly traded companies, so non-SEC registrants, can use either US GAAP, or they can also use IFRS for non-US SEC registrants. So let's talk about some of the governing bodies and agencies that have a role in this process.

So what do they do? Well, they help to create and modify accounting principles, provide guidance, or even enforce rules and regulations. So just how many are there? There are a lot. So we have FASB, GASB, and the AICPA. But we also have some federal agencies. So there's the IRS, the GAO, as well as the SEC. Let's talk about that first group.

Let's start with FASB, GASB, and the AICPA. What's the AICPA? That is the American Institute of Certified Public Accountants that was established in 1887. And it really is the main professional association for CPAs. And it helps them by developing additional guides that assist them when they're implementing US GAAP. GASB-- the Governmental Accounting Standards Board, established in 1984. They're in place in order to develop standards of financial reporting for state as well as local governments.

The most important group here is probably FASB. So that's the Financial Accounting Standards Board. They were established in 1973, and they have a very important role as it relates to US GAAP. So for US GAAP, what FASB does is they develop US GAAP. So they develop new standards, as well as control the implementation of previous standards as well as new standards that are coming out. So the FASB has a very important role in this process.

Now switching gears, some of the federal agencies that are involved in this process as well. We have the SEC, the Securities and Exchange Commission. Now they were established in 1934, and you can think of them as a rule enforcer. So they develop rules and enforce securities law.

The GAO-- the Government Accountability Office. They were established in 1921, and they're really a government watchdog. They work for Congress, investigating program spending related to the use of public funds. So they have a very important role. The IRS-- we're all probably familiar with the IRS, the Internal Revenue Service. They were established in 1862, and they're the taxman. So they deal with collecting taxes and enforcing the IRS code.

So let's recap. In a nutshell, let's do a quick fill in the blank exercise. So governing principles, US GAAP, helps to create three things. What three things are those? Relevance, reliability, and comparability. GAAP is used by US companies. And IFRS is used by non-US companies.

Now we also talked about a lot of groups, and there were a lot of definitions. So let's do a quick matching exercise to refresh. So definitions, we had these six groups. Now let's do a quick matching. So this professional association is for CPAs. That would be the AICPA.

This group develops rules and enforces securities law. That would be the SEC, the Securities and Exchange Commission. This group investigates the use of public funds. That would be the Government Accountability Office, or GAO.

This group develops and controls US GAAP. They have a very important role. That would be FASB, Financial Accounting Standards Board. This group collects taxes and enforces internal revenue code. There's a key word there, internal revenue. So that would be the IRS, the Internal Revenue Service. And finally, this group develop standards for government. That would be the GASB, the Governmental Accounting Standards Board.

I'd like to thank everybody for listening. Hope you enjoyed. And I hope to see you next time.