Financial Accounting Standards Board FASB: Definition and How It Works

(The company must be publicly traded, i.e. the stock sold on a stock exchange, to easily find the annual report). The  Accounting Principles Board (ACP) was the authorizing body for the AICPA from 1959 to 1973. Its role was to issue policies relating to accounting theories and pronouncements. The FASB was authorized in place of ACP to create accounting standards more effectively and independently.

  • During 1939 to 1959 CAP issued 51 Accounting Research Bulletins that dealt with a variety of timely accounting problems.
  • It was widely criticized for its requirement that more liabilities be accrued.
  • APB was the main organization setting the US GAAP and its opinions are still an important part of it.
  • At the end of the decade, the FASB directly participated in the working party that led efforts to restructure the IASC into the IASB.

It also may be appropriate to present certain historical analysis in a letter of response to a discussion memorandum or exposure draft. In 2009, the FAF launched the FASB Accounting Standards Codification, an online research tool designed as a single source for authoritative, nongovernmental, generally accepted accounting principles in the United States. According to the FAF, the tool “reorganizes the thousands of U.S. GAAP pronouncements into roughly 90 accounting topics and displays all topics using a consistent structure.” The website also provides relevant Securities and Exchange Commission (SEC) guidance on those topics. A “basic view” version is free, while the more comprehensive “professional view” is available by paid subscription. In order to prepare the financial statements, it is important to adhere to certain fundamental accounting concepts. The FASB works closely with the Securities and Exchange Commission (SEC) and the International Accounting Standards Board (IASB).

Beginning in the 1990s, efforts to harmonize accounting standards internationally evolved into a broad convergence effort. In 2001, the IASC was restructured into the IASB; and by 2009, the European Union and over 100 other countries had adopted international standards or a local variant of them. Several other countries, including Canada, Korea, India and Brazil, had committed to adopt international standards by 2011.

FASB 11 concepts

The aim of the EITF is to assist the FASB in improving financial reporting. The EITF helps analyze and establish a more consistent set of guidelines. Businesses and investors have mixed feelings about the new accounting standards. This can make it difficult to properly complete the reporting requirements and for investors to understand. Investors feel that the standards could more easily interpret information, especially the information needed to analyze a company.

The IASB decided to undertake a comparability and improvements project to reduce the number of allowable alternatives and make the standards more prescriptive rather than descriptive. The American Institute of Certified Public Accountants (AICPA) hosted the 8th International Congress of Accountants. Many participants urged that steps be undertaken to foster development of auditing, accounting, and reporting standards on an international basis. The main missions of the FASB are achieved with the help of the GASB and FAF.

  • Nonprofits typically use GAAP, or Generally Accepted Accounting Principles.
  • The FASB replaced the American Institute of Certified Public Accountants’ (AICPA) Accounting Principles Board (APB) on July 1, 1973.
  • The European Union (EU) adopted legislation requiring all listed companies to prepare their consolidated financial statements using IFRS starting in 2005, becoming the first major capital market to require IFRS.
  • If no connection with revenues can be established, costs are recognized immediately as expenses (e.g., general administrative and research and development costs).
  • Without the Accounting Standards Board, ground rules for transparency and consistency in accounting, reporting, and financial statements wouldn’t have been as well established when the FASB came about.

Accordingly, any views so expressed are those of the author and do not necessarily reflect the views of the Standards Board.) may be shortened to as few as 30 days when the Board believes that sufficient information is available to enable it to proceed quickly. It is also possible for the discussion memorandum and public hearings to be eliminated entirely. For those projects in which a discussion memorandum is issued and the complete “due process” cycle is followed, historical studies pertaining to the problem that are available during the period that the FASB staff is preparing a memorandum could be very useful. Since a discussion memorandum is oriented to decision issues, an historical study that focuses on the relevant issues raised in the past and which analyzes past reporting practices could be of assistance in framing current issues.

Under the proposed Roadmap, the Commission would decide by 2011 whether adoption of IFRS would be in the public interest and would benefit investors. The proposed Roadmap identified several milestones that, if achieved, could lead to the use of IFRS by U.S. issuers. The SEC also proposed that U.S. issuers meeting certain criteria be given the option of filing financial statements prepared using IFRS as issued by the IASB as early as years ending after December 15, 2009 (Proposed Roadmap).

The standard has been working well, however, and the financial community has been asking for an expansion and refinement of the standard. The board has asked its staff to look into whether the issue merits space on the board’s agenda. The board is also working on a revenue recognition project in conjunction with the International Accounting Standards Board. Herz said that FASB hopes to make “good progress” on the project but that it will take a few years to complete.

How is FASB different from IASB?

Through GAAP, investors can more easily compare and understand the financial health of different businesses. This uniformity also has ancillary benefits for regulators, lenders, corporate managers, and the accounting community. On August 7, 2007, the SEC issued Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards. The Concept Release sought public input on whether to give U.S. public companies the option of using IFRS as issued by the IASB in their financial statements filed with the SEC (Concept Release). The European Union (EU) adopted legislation requiring all listed companies to prepare their consolidated financial statements using IFRS starting in 2005, becoming the first major capital market to require IFRS. The EU subsequently decided to “carve-out” a portion of the international standard for financial instruments, producing a European version of IFRS.

The Securities and Exchange Commission (SEC) – It oversees the market regulations and protects the investor’s interest in the US markets. It aims to increase the investor’s confidence in the system to encourage more market participation. (15) Section 978 of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 provided for similar accounting support fees for the GASB, expected to begin in 2012. The staff works directly with the Board and project resource groups, conducts research, participates in roundtable meetings, analyzes oral and written comments received from the public, and prepares recommendations and drafts of documents for consideration by the Board. Other influential organizations include the Government Finance Officer’s Association (GFOA), American Accounting Association, Institute of Management Accountants, and Financial Executives Institute.

An International Standard

As a further affirmation of that commitment, the Boards issued a joint statement describing their plans and milestone targets for achieving the goal of completing major MoU projects by mid-2011. Both the FASB, or the Financial Accounting Standards Board, and the IASB, or the International Accounting Standards Board – deal with the standardization of accounting, but their approaches to achieving the regulation of accounting and financial reporting standards are different. The board isn’t yet sure, but it is thinking about once again taking up the thorniest of accounting issues, employee stock option compensation. In November, the board issued a proposal to attempt to converge FASB’s Statement 123 with an international standard proposed by the International Accounting Standards Board.

The SEC Issues a Concept Release on Possible Optional Use of IFRS by U.S. Issuers

The SEC stated that, based on the evidence of private sector support for the FASB, it would continue to look to the private sector to establish and improve accounting principles. Generally Accepted Accounting Principles (GAAP or U.S. GAAP, pronounced like “gap”) is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC)[1] and is the default accounting standard used by companies based in the United States. Today, government agencies and non-profit organizations as well as public corporations generally adopt GAAP standards.

Following the Stock Market Crash of 1929 and the ensuing Great Depression, the U.S. government sought ways to regulate the practices of publicly traded companies and other major market participants. The government believed that at least some of the causes for the crash were due to less than above board practices by publicly traded companies. It was replaced in the early 1970s by FASB, a private, non-profit organization led by seven full-time board members. Those standards began to be developed by the APB, which was charged with creating guidelines for accounting and issuing pronouncements related to accounting theory and practice.

Their goal is to make sure everyone involved has a good understanding of all standards. While FASB proposals were often controversial, the FAF itself occasionally was embroiled in controversy. Following an FASB statement on stock options, the Financial Executives Institute (FEI) initiated proposals in 1996 that were seen by the SEC as an attempt to put the FAF, and thus the FASB, under preparers’ control. The SEC had endorsed the Wheat Study Group recommendations, and in December 1973 gave the FASB its imprimatur in Accounting Series Release (ASR) No. 150.

Accruals and Deferrals: Timing of Recognition vs. Cash Flow

Activities completed by the FASB are conducted by seven board members, all of whom are asked to leave their jobs from outside companies or organizations prior to joining the FASB in order to ensure for the fair creation of accounting standards. These board members are chosen by the Financial Accounting Foundations, or FAF, and can serve up to two five-year terms. Herz said that FASB has a trio of business combinations projects in the hopper and hopes to issue exposure drafts by mid-year.