Exposure Draft
Definition
An Exposure Draft is a preliminary version of a proposed new or revised financial reporting standard issued by a standard-setting body, such as the Financial Reporting Council (FRC), for public comment and discussion before the final standard is published.
Purpose
The primary purpose of an exposure draft is to solicit feedback from stakeholders including accountants, auditors, regulators, and the public. This process ensures that the proposed standards are thoroughly vetted, feasible for implementation, and considerate of the practical implications for businesses and markets.
Examples
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IFRS Exposure Drafts: The International Financial Reporting Standards (IFRS) Foundation often issues exposure drafts for new standards or amendments to existing standards. They seek input on the aspects that might need rethinking or improvement before finalizing the standards.
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FASB Exposure Drafts: The Financial Accounting Standards Board (FASB) issues exposure drafts when proposing changes to the Generally Accepted Accounting Principles (GAAP) in the United States.
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ASB Exposure Drafts: The Auditing Standards Board (ASB) may issue exposure drafts prior to revising or creating new auditing standards.
Frequently Asked Questions (FAQs)
Public comment is crucial as it ensures that a broad range of perspectives and potential impacts are considered before finalizing the standards. This feedback can lead to significant revisions that enhance the standard’s applicability and acceptability.
The comment period typically ranges from 60 to 180 days, depending on the complexity of the draft and the urgency of the standard-setting body.
Who can provide feedback on an exposure draft?
Feedback is typically welcomed from all interested parties, including professionals in accounting and finance, businesses, investors, academics, and other stakeholders.
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Financial Reporting Council (FRC): An independent regulator responsible for promoting high-quality corporate governance and financial reporting in the UK.
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Financial Reporting Standard (FRS): Standards issued by accounting standard setters that prescribe how financial statements should be prepared and presented.
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Generally Accepted Accounting Principles (GAAP): A common set of accounting principles, standards, and procedures that companies use to compile their financial statements.
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International Financial Reporting Standards (IFRS): Standards developed by the International Accounting Standards Board (IASB) that provide a global framework for how public companies prepare and disclose their financial statements.
Online Resources
Suggested Books for Further Studies
- “Wiley IFRS 2022: Interpretation and Application of International Financial Reporting Standards” by PKF International Ltd
- “Accounting Standards: A Comprehensive Question Book for the CPA Exam” by Patrick R Delaney
- “GAAP 2022: Interpretation and Application of Generally Accepted Accounting Principles” by Joanne M. Flood
- “Financial Reporting and Analysis: Using Financial Accounting Information” by Charles H. Gibson
Accounting Basics: “Exposure Draft” Fundamentals Quiz
### What is the primary purpose of issuing an exposure draft?
- [ ] To finalize financial reporting standards without public input.
- [ ] To provide a draft for auditor review only.
- [x] To solicit feedback from stakeholders before finalizing the standard.
- [ ] To replace outdated financial standards immediately.
> **Explanation:** The primary purpose of an exposure draft is to solicit feedback from various stakeholders to ensure the proposed standard is thoroughly vetted and feasible before becoming a finalized reporting standard.
### Who typically issues an exposure draft?
- [ ] Individual companies
- [ ] Local government entities
- [ ] Financial statement preparers
- [x] Standard-setting bodies like the FRC or IASB
> **Explanation:** Standard-setting bodies, such as the Financial Reporting Council (FRC) or the International Accounting Standards Board (IASB), typically issue exposure drafts.
### What is commonly sought during the exposure draft comment period?
- [x] Input on potential improvements, feasibility, and implications of the proposed standard.
- [ ] Sales data and market trends.
- [ ] Company financial standings.
- [ ] Historical accounting practices.
> **Explanation:** The comment period for an exposure draft seeks input regarding potential improvements, the feasibility of implementation, and possible implications for stakeholders.
### Who can provide feedback on an exposure draft?
- [ ] Only certified public accountants
- [ ] Financial regulators only
- [ ] Investors exclusively
- [x] Any interested parties including accountants, businesses, and the public
> **Explanation:** Any interested parties including accountants, businesses, investors, academics, and the general public are encouraged to provide feedback on an exposure draft.
### How long is the typical public comment period for an exposure draft?
- [ ] 30 days
- [x] 60 to 180 days
- [ ] 45 days
- [ ] 1 year
> **Explanation:** The typical public comment period for an exposure draft ranges between 60 to 180 days, depending on the complexity and urgency of the draft.
### What happens after the public comment period of an exposure draft?
- [x] Feedback is reviewed and the draft is revised if needed before finalization.
- [ ] The draft automatically becomes a final standard without changes.
- [ ] The sponsoring body discards the feedback.
- [ ] The draft is ignored.
> **Explanation:** After the public comment period, the standard-setting body reviews the feedback received, revises the draft as necessary, and then takes steps toward finalizing the standard.
### During which stage are financial reporting standards openly discussed and can be modified based on input?
- [ ] Finalization stage
- [x] Exposure draft stage
- [ ] Implementation stage
- [ ] Enforcement stage
> **Explanation:** The exposure draft stage is when proposed financial reporting standards are openly discussed and can be modified based on public and stakeholder input.
### Which of the following organizations is known for issuing exposure drafts?
- [x] Financial Reporting Council (FRC)
- [ ] General Electric
- [ ] Wall Street Journal
- [ ] Standard & Poor's
> **Explanation:** The Financial Reporting Council (FRC) is a well-known standard-setting organization that issues exposure drafts.
### Why are exposure drafts important in the standard-setting process?
- [ ] They directly generate revenue for standard-setters.
- [ ] They are archive documents with no current relevance.
- [x] They ensure stakeholders' concerns and practical implications are addressed.
- [ ] They replace local accounting standards without changes.
> **Explanation:** Exposure drafts are important because they ensure that stakeholders' concerns and the practical implications of proposed standards are addressed before they are finalized.
### What type of standard is typically released after incorporating feedback on an exposure draft?
- [ ] Draft Accounting Policies
- [ ] Market Trend Reports
- [x] Final Financial Reporting Standards
- [ ] Quarterly Earnings Guidance
> **Explanation:** After incorporating feedback on an exposure draft, a final financial reporting standard is typically released.
Thank you for exploring our comprehensive guide on “Exposure Draft” and tackling our informative quiz questions. Continue advancing your financial and accounting knowledge with diligence!
