Financial Accounting Standards Board (FASB)

What Is The Financial Accounting Standards Board (FASB)?

The Financial Accounting Standards Board (FASB) is a private organization that was established in 1973 and operates under the Securities and Exchange Commission's (SEC) oversight. It is responsible for setting financial accounting and reporting standards in the United States.

This new entity superseded the former slow-moving Committee on Accounting Procedure (CAP) and the Accounting Principles Board (APB).

FASB aims to create and improve financial accounting and reporting standards that provide reliable and relevant information to investors, creditors, and all other financial information users they need to make informed decisions.

The board is essential as the designated rulemaker to guarantee the credibility and transparency of private sector financial information. 

Financial Accounting Standards Board is authorized to issue Accounting Standards Updates (ASUs) to amend or improve the existing Generally Accepted Accounting Principles (GAAP)  for financial reporting concerning public, private, and not-for-profit organizations.

GAAP guides how companies prepare and present their financial statements, ensuring that they are accurate, reliable, and relevant to users of financial information.

These updates are intended to capture emerging issues or changes in business practices that affect economic events and transactions reflected in financial statements.

How Does The Financial Accounting Standards Board (FASB) Work?

The Financial Accounting Standards Board is headquartered in Norwalk, Connecticut, and has seven members appointed by the Financial Accounting Foundation (FAF).

The FAF’s Board of Trustees oversees the FASB to ensure it operates independently and in the public interest.

The Board of Trustees appoints members of FASB, approves its budget, and receives overall guidance and support from the latter.

These members are full-time professionals specializing in accounting and finance. They are committed to setting accounting standards through an open due process that allows public contributions.

The board is chaired, and its activities are guided by a chairperson responsible for running the FASB. Richard R. Jones is the Chairman, and James L. Kroeker is its Vice Chairman.

In addition, FASB has consulted stakeholders such as investors, auditors, financial statement preparers, and other interested parties in proposed standards.

They follow a detailed process of developing accounting standards involving extensive research, public consultation, and deliberation. This process guarantees that all stakeholders can vote on the proposed standards before they are finalized.

This comprehensive approach helps ensure that accounting standards match users' expectations while addressing actual implementation issues.

When the FASB issues a standard, it becomes a GAAP in the US. These standards dictate how financial statements should be prepared and presented to ensure uniformity across different organizations.

History of the Financial Accounting Standards Board (FASB)

In 1973, the US established the Financial Accounting Standards Board as a requirement for uniform and harmonized accounting principles.

The CAP and APB provided accounting standards before the FASB came into existence. Nevertheless, such bodies were criticized for needing to be more dependent and slow in responding to the dynamic needs of the business environment.

In 1984, the standard board established the Emerging Issues Task Force (EITF) to address emerging accounting issues not specifically addressed in existing accounting standards. These positions assist in addressing certain transactions or events' accounting and reporting aspects.

To ensure compatibility of the financial statements for global comparison, the FASB has been working closely with international standards-setting bodies, such as the International Accounting Standards Board (IASB).

The aim is to develop a single set of worldwide standards of global accounting applicable to all companies worldwide.

In 2002, FASB and IASB signed the Norwalk Agreement—a major step in the process of convergence where they committed to developing high-quality, comparable accounting standards for domestic and cross-border financial reporting.

The Sarbanes-Oxley Act of 2002 also gave FASB more authority. The Sarbanes Oxley Act created PCAOB, which regulates auditors of public companies and ensures compliance with quality auditing and reporting standards.

In 2006, the FASB and the American Institute of Certified Public Accountants (AICPA) agreed to improve the convergence and comparison of financial reporting. 

To appreciate investor points of view for the standard-setting process, the FASB launched an Investor Task Force comprised of investors and analysts who contribute their opinions and thoughts on financial reporting issues from an investor’s perspective in 2016.

FASB and IASB responded to the financial crisis by forming the Financial Crisis Advisory Group to provide effective solutions to the complex challenges and intricacies of the crisis.

In 2009, the FASB published the Accounting Standards Codification, which consolidated and aligned all the previous standards into a single authority on authoritative accounting guidance called ASC.

In the Financial Accounting Standards Board context, the conceptual framework was one of the notable accomplishments. 

The framework presents the objectives, qualitative characteristics of financial statements, and basic elements for forming accounting standards. It helps the FASB develop accounting standards that are consistent and relevant.

Functions Of FASB

Here are some important functions of the board that are crucial to its operation:

1. Formulating and Issuing Accounting Principles: The Financial Accounting Standards Board is essential in formulating and issuing accounting principles that assist firms in preparing and presenting their financial statements.
2. Promoting Uniformity and Comparability: These standards enable uniformity and comparability across multiple entities, encouraging transparency and offering trustworthy information for decision-making.
3. Regular Review and Adaptation: FASB regularly reviews existing principles to address emerging issues or changes in business practices to maintain relevance and keep accounting principles up-to-date.
4. Stakeholder Engagement: FASB continues to interact with stakeholders through a transparent due process, which entails requesting public opinion, conducting research studies, having public roundtables, and asking for comments from diverse market participants.
5. Inclusivity and Diverse Perspectives: By involving all relevant parties, FASB promotes inclusivity and gathers diverse perspectives on essential accounting matters.

FASB 11 Concepts

The Financial Accounting Standards Board has identified eleven concepts that form the basis for developing accounting standards. The standard-setting activities are guided by the following concepts, which help make the accounting standards consistent and relevant:

1. Money measurement: This concept underlines that, generally, every recorded event or transaction is measured in terms of money; the local currency is the unit of measurement. 
2. Entity: Financial statements always treat the business as a separate entity. The convention adopted in preparing accounts treats a business as separate from its owner(s). This means the owner's transactions should never be mixed with the business's.
3. Going Concern: This concept assumes that, when preparing a normal set of accounts, the business will continue to operate in approximately the same manner for the foreseeable future (at least the next 12 months).
4. Dual-aspect: Bookkeeping is based on the idea that each transaction has an equal but opposite effect. An account is maintained for every asset, liability, income, and expense. Every transaction is recorded twice so that a credit balances every debit, ensuring that assets equal liabilities plus equity.
5. Accounting period: Specific periods are determined for preparing and reporting financial statements. It is usually 12 months or 52 weeks. The beginning of the accounting period differs according to jurisdiction. For example, one entity may follow the calendar year, January to December, while another may follow April to March as the accounting period.
6. Conservation: This concept encourages a cautious approach to recognizing and disclosing uncertainties, promoting prudence in financial reporting. 
7. Realization: The realization concept states that revenue should be recognized when it is realized and earned, not necessarily when cash is received.
8. Matching: The matching convention requires that revenue earned is matched with the expenses incurred in earning it.
9. Consistency: Consistency underscores the importance of applying accounting methods consistently over time, promoting comparability in financial reporting.
10. Materiality: Information is material; omitting or misstating it could influence decisions that the primary users of general-purpose financial reports make based on those reports that provide financial information about a specific reporting entity.
11. Cost: This concept suggests that financial information should be based on historical cost rather than market value, promoting objectivity and reliability.

Criticism Against FASB

The Financial Accounting Standards Board is important in establishing accounting rules, but it has come under criticism from numerous stakeholders. Some criticisms are listed below

1. Complexity 

One of the most frequent criticisms directed at FASB is the complexity of its accounting standards. Critics argue that the standards are often overly intricate and difficult to interpret, leading to confusion and potential errors in financial reporting. 

This complexity can also increase business costs as companies must invest more resources into understanding and complying with these standards.

2. Mark-to-model

Another area of criticism is the mark-to-market accounting method, which requires companies to value certain assets and liabilities at their fair value. 

Some critics suggest that mark-to-market accounting will increase volatility in financial statements, mainly in periods of instability in the market.

3. Materiality

Another criticism is the need for more clarity on materiality in accounting standards. Materiality is the relevance or importance of a thing or an event in influencing the decisions of users of financial statements. 

However, critics assert that materiality is open to interpretation and may be manipulated, leading to contradictions in financial reporting.

4. International comparability vs. convergence

The FASB’s convergence with International Accounting Standards has also been criticized. Others argue that convergence might lead to the loss of specifics of US GAAP. In contrast, others think the total adoption of IFRS might be improper or infeasible for the US market.

5. Complexity 

One common criticism directed at FASB is the complexity of its accounting standards. Critics argue that the standards are often too intricate and difficult to interpret, leading to confusion and potential errors in financial reporting. 

This complexity can also increase business costs as they must invest more resources into understanding and complying with these standards.

6. Fair value measurement 

Another critique is that FASB's focus on fair value measurement may not accurately reflect the actual economic value of assets and liabilities. 

Critics argue that this emphasis on fair value can lead to volatility in financial statements and may not provide a reliable representation of an entity's financial position.

7. Lack of transparency

There are worries among some stakeholders regarding the perceived deficiencies in transparency and independence of FASB. 

Some argue that the board’s decision-making process could be compromised due to politics and industry interests, and the standard-setting activities would be undone.

FASB's Role In Emerging Issues

The Financial Accounting Standards Board is proactive when addressing emerging financial reporting challenges in today's rapidly evolving financial landscape. Three prominent issues that have garnered attention are:

1. Cryptocurrency

With the rise of cryptocurrencies like Bitcoin and Ethereum, the FASB recognized the need for clear accounting standards in this nascent industry.

They initiated discussions and collaborated with experts to develop guidelines for recognizing and measuring cryptocurrency holdings. These efforts aimed to provide consistency and reliability in cryptocurrency financial reporting.

2. Sustainability Reporting

As sustainability and environmental, social, and governance (ESG) factors gained prominence in investment decisions, the FASB integrated sustainability reporting into financial statements. 

They engaged in dialogue with stakeholders to determine how ESG-related information could be incorporated effectively, enhancing the transparency of a company's sustainability initiatives.

3. Impact of Technology

The rapid advancement of technology has transformed how businesses operate and report financial information.

The FASB recognized the significance of digital transformation and began exploring the impact of artificial intelligence, blockchain, and data analytics on financial reporting.

They are actively involved in ensuring that financial statements adapt to the digital age, maintaining their relevance and accuracy in this rapidly evolving landscape.

Recent Developments In FASB

The accounting industry has changed significantly due to recent developments in the Financial Accounting Standards Board. Such developments include revisions to accounting standards, guidance on specific issues, and efforts to improve financial reporting transparency. 

Here are some significant developments that have occurred on this journey:

1. Post-Pandemic Accounting: The COVID-19 pandemic brought about unique accounting challenges, such as assessing the impact of economic uncertainties on financial statements. FASB issued guidance to address these challenges and provide relief to companies affected by the pandemic.
2. Environmental, Social, and Governance (ESG) Reporting: As ESG considerations gain importance in business, FASB is exploring ways to incorporate ESG reporting into financial statements.
3. Current Expected Credit Loss (CECL) model: The CECL model aims to provide more timely recognition of credit losses and improve the accuracy of financial statements.
4. ASC 606: This standard offers a blueprint for revenue recognition from customer contracts in different industries. It improves comparability in revenue recognition and enhances users’ understanding of an entity’s performance in financial statements.
5. New Guidelines: The Board recently released new guidelines for fair value measurement, leases, and income taxes. These guidelines require organizations to provide financial statement users with more transparent and relevant information.
6. Collaboration: Additionally, FASB has worked closely with international standard-setting organizations like the International Accounting Standards Board (IASB) to ensure that accounting standards are aligned globally.

Are FASB And IASB Different?

While FASB and IASB share similar goals of establishing high-quality accounting standards, they differ in geographical scope and underlying principles. 

It is essential for accountants and professionals working in finance to be aware of these key distinctions between FASB and IASB to ensure compliance with applicable accounting standards based on their geographical context.

Conclusion 

The Financial Accounting Standards Board is an important independent organization that sets accounting standards in the United States. 

The standards have provided a common language in the financial markets for businesses to communicate financial information to their stakeholders, enhancing transparency and trust in the financial markets.

It continually updates its standards to cope with changing business practices and new issues. It guarantees the relevancy and reliability of financial reporting. This commitment to high-quality accounting standards has a far-reaching effect on global financial reporting. 

The FASB, however, receives criticism for actively seeking feedback from stakeholders and conducting public consultations to address concerns and ensure the relevance and usefulness of its accounting standards. 

It maintains its commitment to achieving excellence in financial reporting by setting and refining accounting standards, which are essential for the global financial ecosystem.

Its functions ensure high-quality financial reporting standards that cater to users’ needs and the complexity of modern business environments. 

FASB is diligent in setting standard practices for financial accounting and engaging stakeholders to guarantee transparency and reliability of financial accounting practices.

Researched and authored by Prerana Agrawal |  LinkedIn

Reviewed and edited by Parul Gupta | LinkedIn

Free Resources

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