 Hello and welcome to the session in which we'll discuss what is gap and what is the purpose of gap and who sets gap Let's go ahead and review real quick. What is the objective of financial reporting? Why do we have financial reporting? What purpose does it serve? Well financial reporting is designed to provide useful financial information to two groups of people mainly Investors and creditors and who are these two groups? Investors and creditors are the groups that fund fund companies either through loans or through equity investments buying into the various companies now These two groups investors and creditors They need information to make a decision before you lend money before you lend money another company Before you invest in a company you want to know. How is that company doing and often times you're going to have a Bcd many options many companies asking you for money Asking you to lend them money asking you to invest in them. How are you gonna make that decision? Well, if all these companies company a versus company b versus company c are Presenting their financial information in a way. That's comparable. Then I can compare a to b to c and make the proper decision And this is why we do we need to have a uniform set of accounting standards That's gonna help us Compare the performance of various companies and this is where gap comes into place gap is Specific as well as broad guidelines that companies follow when they're Preparing their financial statements. It helps companies measure their assets measure their liabilities How to report information on their financial statements? What to report in the notes? Once I have all this information once everything is comparable Then I can make a better decision whether I'm an investor or a creditor now the question becomes who sets gap Who creates gap before we proceed any further? I have a public announcement about my company farhat lectures comm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley Gleam miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of Lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today Well in theory the US Congress can create accounting rule and sets gap, but they don't do that They assign this process to the SEC that the Securities and Exchange Commission the Securities and Exchange Commission is a government Government entity and also the SEC don't don't do that the SEC Delegate this process to the private sector. So let's take a look first at How was the SEC created or how was the SEC born? Well, the SEC was created or came to life after the stock market crash of 1929. Why? because Many companies were reporting misleading information or they were not reporting enough information under financial statements Which in turn misled the investors which in turn led to the stock market crash of 1929 So as a result Congress wanted to restore confidence in the stock market So what would they do they created this organization called the Securities and Exchange Commission? SEC to do what to overseas the market and the SEC specifically created two important acts in Restoring confidence because after the stock market crash No one wanted to invest in the stock market and those two acts are the Securities acts of 1933 and 1934 the 1933 Securities Act deals with initial public offering or what we call the primary Market what is that? Before a company goes public before a company goes public So for example, let's look at a company like meta, which is Facebook At for a long period of time meta or Facebook was a private company that at some point This private company wants to go public. They go through something called initial public offering They sell their stock They sell part of the company to up to the public for the first time and they become a public company Now this process going from private to public is called I they go through an IPO initial public offering Before you sell your stocks to the public you have to comply with the SEC act of 1933 and in this act They ask you for certain to disclose certain information. They check your financial statements. They want to make sure it's audited So on and so forth then another act called the Securities Exchange Act of 1934. So notice what we did in 1934. We added the word exchange to the act What does that deal with it deals with secondary markets? So 1933 with primary market when the company goes public initially you follow those rules in 1934 once you are public now you are traded on the exchange This is where public different people are Trading amongst each other. So the public is trading stocks here. The company will have to report certain information 10k which is the annual report thank you's Certain reports on regular basis to inform the investors what's going on to inform the public But at this point the stock is already public the stock is already public now Notice the SEC The main thing is that 1933 1934 that oversees the primary and secondary market, but they don't set accounting rules They delegate this process to the private sector, which is the private sector, which is not a government sector Now we're gonna take a quick short history lesson about the private sector Well, the private sector started in 1938 and They created the committee that was created first was the American Institute of Accounting I AI a which is a national professional organization for CPAs. This is how it started It was eventually named AI CPA, which is the American Institute of Certified Public Accountant Which we are with that's what we know about today and if you're not a student member you should be a student member The this organization this committee on on accounting procedures They issued 51 accounting research bulletings or ARBs research bulletings Okay, you're simply put bulletins and those are basically accounting rules They for the issue 51 of them between 1938 and 1959 they did not have a theoretical framework and They used a piecemeal approach. What does a piecemeal approach means? It means There's an issue you go to them. You ask them about the issue that that piecemeal and they will deal with it Right right there. This is what a piecemeal issue is and this committee on accounting procedures lasted from 1938 Till 1959 and they issued bulletin now Why am I emphasizing this point bulletin bulletin because on the CPA exam? You want you may want to know that the committee on accounting procedures. They issued bulletin Accounting principle board APB that came after the CAP From 1959 to 1973 they issued rather than research bulletin They issued opinions or principles board opinion or for short opinions Okay, APBO's opinions opinions now They they members were Mostly volunteers mostly volunteers in this organization. They were mostly CPAs Some criticism for the accounting principle board was it did not react fast enough to accounting changes again It me it used that piecemeal approach And it was criticized for favoring public accounting interests because I was mostly CPAs Of course, they're gonna favor their group over the interests of other groups and there was no theoretical framework It means they were still using a piecemeal approach This accounting principle board was eventually replaced by what we know today FASB the financial accounting standard board starting in 1973 The FASB represent various constituencies just as not only CPAs and accountant auditors Profit oriented companies not for profit educators financial analyst government so on and so forth It has seven full-time members. It's supported by a foundation called the financial accounting foundation and in 1984 to Fat to react quickly to changes in the industry. It created this EITF emerging issues task force At identify financial reporting issues and attempt to resolve them without involving the FASB So quick a quick way to resolve to answer the industry It primarily addresses implementation issue or a FASB have has a rule and they need more clarification about how to implement the rules This organization the EITF will respond to that It's speeded up the process of standard setting now You can have standard setting earlier and rulings eventually once they once the rulings are ratified by FASB They become they are considered gap. They are considered gap. Basically FASB have the last saying and Also fast be what they did they develop what's called the conceptual framework Which is something that we learn about this conceptual framework the conceptual framework is not gap So rather than following a piecemeal They wanted to create a general rules that you would follow an old situation And this is what the conceptual framework will which we'll talk about in a separate recording FASB issues what we called accounting standards update Not research bulletin not opinions ASU's Accounting standards update and in 2009 they created the accounting standard Corrification what they did they integrated all the topics from the research bulletin from the opinions from the ASU's and a searchable online database called the Corrification it included also portion of the SEC accounting guidance any accounting guidance that the SEC has This codification is organized into nine main topics I'm gonna show you the topics and approximately 90 sub topics and many sub topics under those 90 sub topics, but these are the nine topics which are the first one is the general principle presentation assets liabilities equity revenues expenses Broad transaction in industry information for example if you want to learn about receivable you go under assets You'll go under receivable under receivable. You want to learn about bad that you'd click under bad that so on and so forth This is how you would look up information under the codification It's something that you need to be familiar with when it comes to the CPA exam and as well as an accounting student or a Professional what should you do now go to far hat lectures and look at additional MCQs through false questions That's gonna help you understand these topics better. Good luck study hard and of course stay safe