EITF

Emerging Issues Task Force



[Name of the Instructor]

Emerging Issues Task Force

Question 1

Discuss how the Emerging Issues Task Force influences Generally Accepted Accounting Standards.

Answer 1

The task force with members representing 11 CPA firms, the SEC and the FASB meets every six weeks to hash out the latest accounting issues. ETIF was formed in response to two conflicting issues in the field of accounting.

The CPAs were faced with issues that they were not adequately resolved in the accounting pronouncements. New forms of business and financial instruments including master limited partnerships, derivatives like interest rate swaps were emerging as accounting issues need to be resolved on high priority. Moreover, the growing body of professional pronouncements was creating accounting overload. The FASB established ETIF to meet accountants needs for guidance on accounting policies and practices and and to control the number of issues whose resolution requires formal pronouncements by the FASB (Wishon, 1986). The formation of ETIF proved to be highly facilitating in the profession of accounting. However, it also influenced the current generally accepted accounting principles. The consensus views of ETIF have become de facto GAAP for public companies. Consequently, managements and practitioners who seek timely guidance on new accounting issues refer to ETIF for assistance. John Huber, former director of the Corporate Finance Division of the Securities and Exchange Commission, states that the formation of ETIF has been the most positive step taken by the FASB towards providing timely guidance (Wayne, 1988).

Question 2

Discuss the principal issue related to accounting for multiple exchange rates.

Answer 2

It is a requirement of the foreign currency guidance that a transaction executed in a foreign currency should be recorded in the functional currency of the recording entity. This process is referred as 'remeasurement'. Moreover, it also mandates that financial statements of a subsidiary, denominated in a foreign currency, must be translated into the reporting currency of the consolidating company before being consolidated. This process is known as translation. Countries that do not have exchange controls usually have a single free market exchange rate which is used for the purpose of translating all foreign currency denominated transactions and remittance of dividends to foreign investors. However, countries that have exchange controls may have multiple exchange rates. In such cases, governments impose policies that mandate the settlement of foreign currencies at a favorable or less favorable rate, also known as preferential or penalty rate respectively. The set rate would apply to ...