Historical Context
Financial Reporting Exposure Drafts (FREDs) are preliminary versions of accounting standards issued for public comment before they are formally adopted. Historically, FREDs have played a pivotal role in shaping financial reporting by incorporating stakeholder feedback to refine and improve proposed accounting standards. The concept originated with standard-setting bodies like the Financial Accounting Standards Board (FASB) in the United States and the International Accounting Standards Board (IASB) internationally.
Types/Categories
1. Standard-setting Organizations
- FASB: Financial Accounting Standards Board, responsible for Generally Accepted Accounting Principles (GAAP) in the U.S.
- IASB: International Accounting Standards Board, responsible for International Financial Reporting Standards (IFRS).
2. Exposure Draft Categories
- Revenue Recognition
- Leases
- Financial Instruments
- Presentation and Disclosure
Key Events
- 1973: Formation of FASB and the introduction of the exposure draft process.
- 2001: Establishment of the IASB and the creation of IFRS.
- 2014: Joint FASB/IASB Revenue Recognition Standard exposure draft.
Detailed Explanations
Purpose of FRED
FREDs serve to solicit feedback from a wide range of stakeholders, including auditors, investors, companies, and other interested parties. This open comment period allows for a transparent and democratic process in the development of new accounting standards.
Process of Issuing FRED
- Drafting: Preliminary drafting by standard-setting body.
- Public Comment: Release of FRED for public comment, usually for a period of 60-120 days.
- Analysis: Review of feedback and analysis by the standard-setting body.
- Finalization: Revisions and final issuance of the accounting standard.
Importance and Applicability
Importance
- Transparency: Ensures transparency in the standard-setting process.
- Inclusivity: Allows for input from a broad array of stakeholders.
- Refinement: Helps refine and improve proposed standards.
Applicability
FREDs are applicable across various sectors and industries, providing a structured approach to evolving financial reporting standards and ensuring they meet the needs of a dynamic financial environment.
Examples
- Revenue Recognition FRED: Led to the establishment of a unified standard for revenue recognition across industries.
- Leases FRED: Addressed the classification and presentation of lease obligations in financial statements.
Considerations
- Feedback Period: The length and engagement level of the public comment period.
- Stakeholder Impact: Potential effects on businesses, investors, and auditors.
- Implementation Timeline: Time required for entities to transition to new standards.
Related Terms with Definitions
- GAAP: Generally Accepted Accounting Principles – the standard framework of guidelines for financial accounting.
- IFRS: International Financial Reporting Standards – global standards for financial reporting.
- ASU: Accounting Standards Update – an official update to accounting standards issued by the FASB.
- Convergence: The process of harmonizing accounting standards internationally.
Interesting Facts
- The public comment period for FREDs often results in thousands of responses.
- Joint projects between FASB and IASB demonstrate the global effort towards unified financial reporting standards.
Inspirational Stories
- The successful implementation of the Revenue Recognition Standard showed how collaborative efforts between standard setters and stakeholders could lead to significant improvements in financial transparency and comparability.
Famous Quotes
“Accounting is the language of business.” - Warren Buffett
Proverbs and Clichés
- “Numbers don’t lie, but you have to read between the lines.”
- “Account for the pennies, and the dollars will take care of themselves.”
Expressions, Jargon, and Slang
- Big Bath Accounting: The practice of manipulating financial statements to make bad results look worse to increase future earnings.
- Cookie Jar Reserves: Using reserve accounts to manipulate earnings.
FAQs
Q: What is a Financial Reporting Exposure Draft (FRED)?
Q: Who can provide feedback on a FRED?
Q: How long is the public comment period for a FRED?
References
- Financial Accounting Standards Board (FASB). “About FASB.” FASB.org.
- International Accounting Standards Board (IASB). “Our Mission.” IFRS.org.
Summary
Financial Reporting Exposure Drafts (FREDs) are essential instruments in the evolution of accounting standards. By facilitating public commentary and stakeholder engagement, FREDs ensure that the final standards reflect diverse insights and practical considerations, leading to more robust and universally accepted financial reporting practices.
