Financial Accounting Standards Board
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The Financial Accounting Standards Board (FASB) is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the United States in the public's interest. The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. It was created in 1973, replacing the Committee on Accounting Procedure (CAP) and the Accounting Principles Board (APB) of the American Institute of Certified Public Accountants (AICPA).
The FASB's mission is "to establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports."
The FASB accomplishes its mission "through a comprehensive and independent process that encourages broad participation, objectively considers all stakeholder views, and is subject to oversight by the Financial Accounting Foundation's Board of Trustees."
The FASB is not a governmental body. The SEC has legal authority to establish financial accounting and reporting standards for publicly held companies under the Securities Exchange Act of 1934. Throughout its history, however, Commission policy has been to rely on the private sector for this function to the extent that the private sector demonstrates ability to fulfill the responsibility in the public interest.
The FASB is part of a structure that is independent of all other business and professional organizations. Before the present structure was created, financial accounting and reporting standards were established first by the Committee on Accounting Procedure of the American Institute of Certified Public Accountants (1936–1959) and then by the Accounting Principles Board, also a part of the AICPA (1959–73). Pronouncements of those predecessor bodies remain in force unless amended or superseded by the FASB.
The FASB is subject to oversight by the Financial Accounting Foundation (FAF), which selects the members of the FASB and the Governmental Accounting Standards Board and funds both organizations. The Board of Trustees of the FAF, in turn, is selected in part by a group of organizations including:
- American Accounting Association
- American Institute of Certified Public Accountants
- CFA Institute
- Financial Executives International
- Government Finance Officers Association
- Institute of Management Accountants
- National Association of State Auditors, Comptrollers and Treasurers
- Securities Industry Association
The FASB's structure is very different from its predecessors in many ways. The board consists of seven full-time members. These members are required to sever all ties to previous firms and institutions that they may have served prior to joining the FASB. This is to ensure the impartiality and independence of the FASB. All members are selected by the FAF. They are appointed for a five-year term and are eligible for one additional five-year term. The current members are (with current term end dates indicated):
- Russell G. Golden, Chairman (2017)
- James L. Kroeker, Vice Chairman (2018)
- Daryl E. Buck (2016)
- Thomas J. Linsmeier (2016)
- R. Harold Schroeder (2015)
- Marc A. Siegel (2018)
- Lawrence W. Smith (2017)
In addition to the full-time members, there are approximately 68 staff members. These staff are, "professionals drawn from public accounting, industry, academe, and government, plus support personnel."
In 1984, the FASB formed the Emerging Issues Task Force (EITF). This group was formed in order to provide timely responses to financial issues as they emerged. This group includes 15 people from both the private and public sectors coupled with representatives from the FASB and an SEC observer. As issues emerge, the task force considers them and tries to reach a consensus on what course of action to take. If that consensus can be reached, they issue an EITF Issue and FASB doesn't get involved. An EITF Issue is considered just as valid as a FASB pronouncement and is included in the GAAP.
Creation of the Codification
On July 1, 2009, the FASB announced the launch of its Accounting Standards Codification, declaring it to be "the single source of authoritative nongovernmental U.S. generally accepted accounting principles." The Codification organizes the many pronouncements that constitute U.S. GAAP into a consistent, searchable format. The Codification is not to be confused with the FASB's Conceptual Framework, a project begun in 1973 to develop a sound theoretical basis for the development of accounting standards in the United States.
FASB and the International Accounting Standard Board are working closely together to develop a common Conceptual Framework. The goal is to develop standards that are objectives-based, internally consistent, and internationally converged. Currently Statement of Financial Accounting Concepts No. 8 “Conceptual Framework for Financial Reporting” is being used in the United States. The Conceptual Framework include: measurement attributes used to measure and report economic transactions, events, and arrangements in financial statements; and accounting principles and assumptions that guide recognition, derecognition, and disclosure, as well as the classification and presentation of information in financial statements.
Fundamental qualitative characteristics, relevance and faithful representation allow for decision usefulness. Information that is capable of making a difference in decisions made by financial statement users is relevant. The three components of relevance are:
- Predictive Value – information that should help users form expectations about the
- Confirmatory Value – information that provides feedback to confirm or correct prior predictions and expectations
- Materiality – refers to the nature and magnitude of an omission or misstatement of accounting information that would influence the judgment of a reasonable person relying on that information
Faithful representation is when the words and numbers accurately predict the economic substance of what they purport to represent. The three components of faithful representation are:
- Complete representation – provides a user with full disclosure of all information necessary to understand the information being reported, with all necessary facts, descriptions, and explanations
- Neutral representation – not biased, slanted, emphasized or otherwise manipulated to achieve a pre-determined result or to influence users’ behavior in a particular direction
- Free from error – the information is measured and described as accurately as possible, using a process that reflects the best available inputs
FASB is pursuing a convergence project with the International Accounting Standards Board (IASB) and International Financial Reporting Standards (IFRS). On Sept. 18, 2002, in Norwalk, Connecticut, FASB and IASB met and issued a Memorandum of Understanding. This document outlined plans to converge IFRS and US GAAP into one set of high quality and compatible standards. As part of the project, FASB has begun moving a from the principle of historical cost to fair value.
In June 2009, FASB was criticized by an advisory panel of investors after making changes on mark-to-market accounting in response to political pressure. Lobbyists had obtained its permission for banks to apply a special accounting treatment for toxic assets.
In order to establish accounting principles, the FASB issues pronouncements publicly, each addressing general or specific accounting issues. These pronouncements are:
- Statements of Financial Accounting Standards
- Statements of Financial Accounting Concepts
- FASB Interpretations
- FASB Technical Bulletins
- EITF Abstracts
FASB 11 Concepts
- Money measurement
- Going concern
- Dual aspect
- Accounting period
- International Public Sector Accounting Standards
- International Financial Reporting Standards
- FASB 133
- Financial Accounting Standards Board (2014). Facts About FASB. Retrieved on May 6, 2014.
- Spiceland, David; Sepe, James; Nelson, Mark; & Tomassini, Lawrence (2009). Intermediate Accounting (5th Edition). McGraw-Hill/Irwin. p. 10. ISBN 978-0-07-352687-4.
- Financial Accounting Standards Board (2009). News Release 07/1/09. Retrieved September 8, 2009.
- "Conceptual Statement # 2". FASB.
- Financial Accounting Standards Board and International Accounting Standards Board (2002). Memorandum of Understanding, "The Norwalk Agreement".. Retrieved March 17, 2009.
- Investor group says FASB is compromised, Accountancy Age, June 23, 2009.
- FASB Official Website
- FASB and IASB: Dependence Despite Independence
- Lawrence A. Cunningham, Private Standards in Public Law (Article on FASB's Policy of Copyrighting and Selling its Materials Despite Being Funded by Public Company Fees), Michigan Law Review (2005)
- CFO Summary: The Implications of the FASB Pension Disclosure Guidelines