 Hello and welcome to the session in which we will discuss what is GAP, what is the purpose of GAP and who sets GAP, generally accepted accounting principle. This topic is important if you are studying for the CPA exam or if you are an accounting student taking intermediate accounting. Whether you are a CPA candidate or an accounting student, I strongly suggest you take a look at my website farhatlectures.com. I don't replace your CPA review course, I am a supplemental material, I am a useful addition to your CPA review course. So I can explain the material differently, which in which in turn will help you with your CPA preparation, which in turn will help you to pass your CPA exam. Your risk is to try me for one month, your potential gain is passing your CPA exam and if not for anything take a look at my website to find out how well your university is doing on the CPA exam. I do have resources for other accounting courses, intermediate accounting, governmental accounting, basic accounting, so on and so forth. I have resources for your CPA exam organized by your review course. I also have the AI CPA previously released, question I strongly suggest you take a look at my website. Also connect with me on LinkedIn if you haven't done so, like this recording, share it with other, connect with me on Instagram, Facebook, Twitter and Reddit. So what is GAP, what's the purpose of GAP and who sets GAP. Before we talk about this we need to remember the objective of financial reporting. What is the objective of financial reporting? Very straightforward to provide useful financial information to investors and creditors because those two groups risk their money, risk their capital. Therefore let's provide them as much information as possible to make a decision. That's good, that's fair enough. The question is how do we provide this information? In other words let's assume we have three companies, company A, B and C and each one of them prepared their financial statements using different sets of accounting rules. Well it's going to be very difficult for the investor, for the venture capital to make a decision. Therefore there's a need by investors and creditors to facilitate comparisons. I can compare all three companies and make a better decision. Well what I need is the same sets of rules, the same sets of broad and specific guidelines that's going to help me make that decision. And those broad and specific guidelines that companies should follow in preparing financial statements is called GAP. Generally accepted accounting principle, it's pronounced like the GAP store. So GAP, they will tell the companies how to measure the transaction, how to record the transaction at historical cost, at fair value, how to report this information under financial statements, how does this transaction fits in your balance sheet, fits in your income statement, how does it affect your profitability and what to disclose in the notes of the financial statements, also the related notes. The question is who sets GAP? So okay we have GAP, let's assume it's a book. Who sets GAP? Well we need to know who sets GAP. Who sets accounting standard? Let's talk about in general or in theory. In theory Congress can set accounting standard but they usually they don't do that. So who really sets accounting standard? Well Congress technically delegated this process to an organization called the SEC. Now we need to talk a little bit about the SEC. What is the SEC? When was the SEC born? Well the SEC was born as a result of the stock market crash. Well the stock market crash was the result of misleading and insufficient financial information provided to the investors. So back in the 1920s investors were investing money in companies that it did not really exist and if existed it wasn't doing as well as it was claiming to be doing. So the SEC said you know what we need the Congress said let's create an organization to restore the confidence in the stock market so people will invest again in the stock market. So in response the SEC was born to restore investor confidence. This is the SEC role is to kind of basically overseas the financial market. There are two important act in the SEC especially when the SEC was actually created and to restore the confidence and those are the 1933 Securities Act and the 1934 Exchange Act. Let's talk about the 1933 Securities Act. The 1933 sets the accounting rules and disclosure for IPOs. IPOs are initial public offering for stocks and bonds. It's when the company is selling stocks and bonds for the first time. That's a dangerous process. The investors don't know anything about this company. It's a new company and they're asking you for money. Well guess what? The SEC said you have to disclose certain information. Now this topic the SEC 1933 and 1934 it's covered in your auditing exam, it's covered in your BEC exam and I believe it's covered also in RAG under the under business law. So you need to know a little bit about the SEC for each CPA exam and it's also covered on FAR a little bit. But all you need to know for intermediate accounting is the 1933 oversees the initial public offering and that's important because there's not much known about the company before this process. The 1934 Securities Exchange Act. Notice the word exchange. It's when investors are exchanging their stocks, buying and selling their stocks. It's a secondary market. It's no longer the company going from initial public offering to the public. Now the public is exchanging stocks among themselves. Now here we need to set the rules because now the company is publicly traded. Everybody is buying their stocks. What do they need to do? They need to do this periodic reporting. The 1934 set the rules for reporting requirement. You have to report every three months quarterly reporting. You have to report your financial statements on an annual basis. You have to disclose if there's any major event. So this is what the 1934 deals with but that's basically what the role of the SEC mainly for our purpose. But the SEC really don't set the rules. The accounting rules delegate this process to the private sector. Now let's talk a little bit more about the private sector. We're going to go basically through a short history lesson. From the private sector perspective, the Committee on Accounting Procedures was the first private sector standard setting body. The committee that oversees this is called the American Institute of IAIA. That's the name for it and it was the National Professional Organization for Certified Public Accountant. Now hopefully you know what's the National Professional Organization now. The National Professional Organization is the American Institute of Certified Public Accounting or the AICPA. Some people the AICPA was renamed to replace this organization and this is where the AICPA was born. Now if you are not a member of the AICPA you should be whether you are a CPA or student. There's a student membership. You really want to be a member so this way you can network see what's going on in the industry. It might open doors for you. The Committee on Accounting Procedures issued research bulletin and they issued 51 of them but they were called research bulletin. There was no theoretical framework and they approached each issue on a piecemeal approach so they only responded when an issue was presented to them. They were not active. They just looked at each issue separately. They did not look at the full picture. The CAP was replaced by the Accounting Principle Board. The Accounting Principle Board issued opinions. The reason I'm emphasizing those two words research bulletin and opinion because on the CPA exam who knows you may get a question about this topic or on my exam you may get a question about this topic right. The members of the Accounting Principle Board were volunteers mostly CPA. There was a lot of criticism about this board. It did not react fast enough to accounting changes. Part of it because maybe because they were volunteers. It was also charged with favoring public accounting interests. Again could be because they are mostly CPAs and they excluded other interested group like government, educators, analysts, the private sector and they did not have a theoretical framework. So APB was eventually replaced by FASB and this is what we have now in 1973. So APB went from 1959 to 1973 and 1973 till the present we have FASB. Now you need to know a thing or two about FASB and respond to the criticism obviously of the previous committees. It represented the various constituencies such as auditing profession, profit-oriented companies, accounting educators, financial analysts, government. So it's more inclusive. It's a seven full-time members that represent all these somehow the interests of all these groups. It's supported by the financial accounting foundation that's the committee that oversees this FASB. 1984 they established the emerging issue task force. That's something you need to be aware of and the reason is to to to respond quickly to accounting issues. Remember one of the criticism was you are not responding fast enough. So it's provide information about implementation and resolve accounting issues. So FASB issued a standard. Well they may need some implementation guidance. Well EITF will do so if there's no issue. They will speed up the standard setting process. It will give you an answer for now. Work with it until we issue until we officially issue a standard about stock options or cryptocurrency. How to deal with cryptocurrency. So the rulings eventually are ratified by FASB and are considered gaps. So this is basically the EITF. They'll give you a quick answer for now until FASB kind of make a ruling standard called the accounting issued what's called accounting standard updates. Until they issued an accounting standard update or ASUs you have to look at what the EITF is telling you. The FASB developed a conceptual framework. Now if you notice in the prior for the prior to organization I kept mentioning there is no theoretical framework. Well FASB did develop a theoretical framework called the conceptual framework. It's not part of gap and we're going to talk about the conceptual framework much much more in details in the next in the next session. But you need to understand that the conceptual framework is the theoretical framework for gap. Okay now we have a theoretical framework and well don't worry we'll talk about this a little bit more in the tails. So FASB as I told you earlier it issues accounting standard update or ASU. So when this is when the ruling is final in 2009 what they did they took all the opinions all the research bulletins and all the ASUs and they codified them into something called the accounting standard codification. So integrating and topically organizing or relevant accounting pronouncement comprising gap and a searchable online database. So what they did they took everything that this organization issues over the years organized them in a database that's searchable. They also included anything that's relevant from the SEC any portion of the SEC accounting guidance. So simply put the codification is organized into nine top nine main topics and approximately 90 subtopics and these are the nine topics general principles presentation assets liabilities equity revenues expenses broad transaction and industry and within each topic you have subtopics and part of the CPA exam is to know how to search this accounting standard codification how to quote from the codification it's going to help you tremendously for the exam but one of the simulation could be just to look up a specific codification process. At the end of this recording I'm going to remind you whether you're an accounting student or a CPA candidate to take a look at my website farhat-lectures.com. No I don't replace your CPA review course I'm a useful addition you can try me I have helped hundreds if not thousands of students pass the CPA exam. Also if you're looking for resources for your accounting courses I do have that as well invest in your career invest in yourself good luck study hard and of course stay safe the CPA is worth it.