Accounting principles board

What Is the Accounting Principles Board?

The Accounting Principles Board (APB) was a private-sector body established to set accounting standards in the United States, operating as a precursor to the modern Financial Accounting Standards Board (FASB). Falling under the broader category of Accounting Standards Setting, its primary mission was to develop an overall conceptual framework for U.S. Generally Accepted Accounting Principles (GAAP) and to issue authoritative pronouncements that guided financial reporting practices for public companies. The Accounting Principles Board aimed to reduce the diversity and inconsistencies in accounting practices prevalent at the time.

History and Origin

The Accounting Principles Board was created in 1959 by the American Institute of Certified Public Accountants (AICPA). It succeeded the Committee on Accounting Procedure (CAP), which was perceived as ineffective in addressing the growing complexity of financial transactions and the need for more standardized accounting. The AICPA hoped the APB would provide a more robust and conceptually sound foundation for U.S. GAAP²³, ²⁴.

From 1962 until its dissolution in 1973, the Accounting Principles Board issued 31 "Opinions" and four "Statements," which were considered authoritative guidance for accountants and auditors²². However, the APB faced significant challenges, including criticisms regarding its independence and its ability to respond promptly to emerging accounting issues²⁰, ²¹. Some critics argued that the board, composed primarily of part-time members from major accounting firms, was influenced by client interests and struggled to establish a comprehensive conceptual framework for accounting¹⁸, ¹⁹. The Securities and Exchange Commission (SEC), which has governmental authority over accounting standards, largely relied on private-sector bodies like the APB to set standards but also exercised its influence¹⁶, ¹⁷. The perceived shortcomings and controversies surrounding the Accounting Principles Board eventually led to its replacement by the fully independent, full-time Financial Accounting Standards Board (FASB) in 1973¹⁴, ¹⁵.

Key Takeaways

• The Accounting Principles Board (APB) was the primary private-sector standard-setting body for U.S. GAAP from 1959 to 1973.
• It issued 31 authoritative Opinions and four Statements aimed at standardizing financial reporting practices.
• The APB was a committee of the American Institute of Certified Public Accountants (AICPA).
• Criticisms regarding its independence, part-time membership, and slow response to emerging issues ultimately led to its replacement.
• The Financial Accounting Standards Board (FASB) superseded the APB in 1973, taking over the responsibility for setting U.S. accounting standards.

Interpreting the Accounting Principles Board

The pronouncements issued by the Accounting Principles Board, known as APB Opinions, provided specific guidance on various accounting issues during its operational period. While many of these Opinions have since been superseded by the FASB's Accounting Standards Codification, some of their underlying principles or initial guidance continued to be relevant within U.S. GAAP until their eventual codification¹³. Understanding the context of APB Opinions is crucial for historical accounting research and for analyzing financial statements from the era when the APB was the authoritative body. For instance, companies that were public companies during the APB's tenure prepared their reports according to these specific Opinions.

Hypothetical Example

Consider a hypothetical company, "Alpha Corp," operating in 1970 when the Accounting Principles Board was the primary standard-setter. Alpha Corp engages in a significant business acquisition. At this time, APB Opinion No. 16, "Business Combinations," issued in 1970, would have dictated the accounting treatment for this transaction¹². This Opinion provided guidance on two methods: the pooling of interests method and the purchase method.

If Alpha Corp's acquisition met specific criteria for the pooling of interests method, it would combine the historical financial data of both companies retrospectively, as if they had always been one entity. This would impact how the combined balance sheet and income statement were presented. If it did not meet those criteria, the purchase method would be used, requiring the acquired assets and liabilities to be recorded at their fair values, potentially recognizing goodwill. The Accounting Principles Board's guidance ensured a degree of consistency in how similar business combinations were reported across different entities during that period.

Practical Applications

Although the Accounting Principles Board no longer exists, its historical influence remains a part of accounting practice and historical analysis. The Opinions issued by the APB laid foundational groundwork for many areas of modern accounting, impacting areas like:

• Financial Reporting Evolution: The APB's efforts contributed to the ongoing evolution of financial reporting and the subsequent development of the FASB's comprehensive Accounting Standards Codification.
• Historical Analysis: Professionals analyzing historical financial data of companies from the 1960s and early 1970s must understand the specific APB Opinions in effect at that time to accurately interpret past performance and financial positions.
• Academic Study: The Accounting Principles Board's operational period is a key case study in accounting history, illustrating the challenges and complexities of private-sector standard-setting and its interaction with regulatory bodies like the SEC. The SEC, for instance, actively oversees and influences the accounting standard-setting process, leveraging a public-private partnership model¹⁰, ¹¹.
• Corporate Governance Context: The APB's existence reflects a period where the accounting profession attempted self-regulation to enhance transparency, influencing future discussions around corporate governance and financial accountability.

Limitations and Criticisms

The Accounting Principles Board faced several significant limitations and criticisms during its tenure, which ultimately led to its replacement. A primary critique centered on the perception that the APB lacked independence. Its members, mostly part-time practicing accountants, were seen as susceptible to pressures from their firms and clients⁸, ⁹. This perceived lack of independence, coupled with the part-time nature of its members, often resulted in slow responses to urgent accounting issues and a failure to develop a coherent conceptual framework for U.S. GAAP⁷.

The process by which the Accounting Principles Board developed its Opinions was also criticized for being too slow and reactive, rather than proactive, in addressing complex accounting problems. This ad hoc approach often led to the issuance of opinions that were seen as compromise solutions, rather than conceptually sound standards⁶. For example, the APB's attempts to provide guidance on controversial topics like accounting for business combinations (APB Opinion 16 and 17) faced considerable debate and contributed to the sentiment that a new, independent standard-setting body was needed⁵. These issues raised concerns about the consistency and reliability of financial information, potentially impacting investor confidence.

Accounting Principles Board vs. Financial Accounting Standards Board (FASB)

The key differences between the Accounting Principles Board (APB) and its successor, the Financial Accounting Standards Board (FASB), lie primarily in their structure, funding, and standard-setting process.

The shift from the Accounting Principles Board to the FASB represented a significant reform in U.S. accounting standard-setting, aimed at creating a more authoritative, independent, and responsive body to maintain the credibility of auditing standards and financial reporting.

FAQs

What was the main purpose of the Accounting Principles Board?

The primary purpose of the Accounting Principles Board (APB) was to develop and issue authoritative pronouncements that would establish and improve accounting standards in the United States, thereby bringing greater uniformity and consistency to financial reporting practices under Generally Accepted Accounting Principles (GAAP).

How long did the Accounting Principles Board operate?

The Accounting Principles Board operated for 14 years, from its establishment in 1959 until its dissolution in 1973, when it was replaced by the Financial Accounting Standards Board (FASB).

Did the Accounting Principles Board issue guidance on the cash flow statement?

Yes, the Accounting Principles Board issued guidance on the statement of changes in financial position, which included elements related to the flow of funds and would later evolve into the modern cash flow statement. For instance, APB Opinion No. 19, issued in 1971, specifically addressed reporting changes in financial position.

How did the Accounting Principles Board influence the audit process for companies?

The Accounting Principles Board influenced the audit process by establishing the authoritative accounting principles that auditors had to verify companies followed. Auditors relied on APB Opinions to determine whether financial statements presented a fair and consistent view of a company's financial position and performance.