What Is Accounting Principles Board (APB)?
The Accounting Principles Board (APB) was a prominent body in the United States responsible for establishing accounting standards and principles. Operating from 1959 to 1973, the APB played a crucial role within the broader category of accounting standards, striving to enhance the consistency and comparability of financial reporting in the U.S. It served as a predecessor to the current standard-setting body, working to develop and issue authoritative pronouncements that shaped the landscape of American accounting.
History and Origin
The Accounting Principles Board was established in 1959 by the American Institute of Certified Public Accountants (AICPA). Its formation was a direct response to criticisms leveled against its predecessor, the Committee on Accounting Procedure (CAP), which was perceived as not effectively reducing the range of alternative accounting principles. The AICPA appointed a special committee in 1958 whose report led to the APB's creation in hopes of fostering a more robust and conceptually sound framework for accounting.14 During its tenure, the APB issued 31 "APB Opinions," which provided authoritative guidance on various accounting matters, including revenue recognition, business combinations, and the treatment of specific assets.13 Despite its efforts, the APB faced its own set of challenges, particularly concerning its independence and efficiency, which ultimately led to its dissolution in 1973 and its replacement by the Financial Accounting Standards Board (FASB).
Key Takeaways
- The Accounting Principles Board (APB) was the primary U.S. accounting standard-setting body from 1959 to 1973.
- It was formed by the American Institute of Certified Public Accountants (AICPA) to replace the Committee on Accounting Procedure (CAP).
- The APB issued 31 "APB Opinions" which provided authoritative guidance that contributed significantly to the development of Generally Accepted Accounting Principles (GAAP).
- Concerns over the APB's independence and the volume of its output led to its replacement by the Financial Accounting Standards Board (FASB) in 1973.
Interpreting the Accounting Principles Board (APB)
The legacy of the Accounting Principles Board lies in its foundational contributions to U.S. Generally Accepted Accounting Principles (GAAP). Although superseded, many of the principles established in its Opinions laid the groundwork for modern financial statements. Understanding the APB helps to contextualize the evolution of accounting thought and the ongoing efforts to ensure transparency and reliability in financial reporting. Its pronouncements, such as those related to consolidated financial statements or depreciation, established benchmarks for how companies should present their financial position and performance, influencing practices even today.
Hypothetical Example
Consider a hypothetical company, "Alpha Corp.," in the late 1960s. Prior to the APB's guidance on a specific accounting issue, Alpha Corp. might have had several acceptable methods for recognizing revenue or accounting for an acquisition. With the issuance of an APB Opinion, say, on business combinations (like APB Opinion No. 16, which addressed the pooling-of-interests and purchase methods), Alpha Corp. would be required to adopt the specific accounting treatment mandated by the APB. This would standardize Alpha Corp.'s financial reporting with other public corporations, making their financial statements more comparable to investors and creditors. For instance, if APB Opinion No. 16 required the purchase method for a specific type of acquisition, Alpha Corp. would have to record the acquired company's assets and liabilities at fair value, along with any associated goodwill.
Practical Applications
The impact of the Accounting Principles Board is evident in the foundational principles that continue to inform modern accounting practices. Its Opinions provided a structured approach to many complex financial reporting issues. For example, APB Opinions provided guidance on accounting for intangible assets, pensions, and interim financial reporting, issues that are still critical for corporate finance professionals and investors today. While the specific pronouncements have largely been integrated into the FASB's Accounting Standards Codification and superseded by later FASB Statements, the conceptual underpinnings derived from the APB's work remain.12, The board's efforts were crucial in establishing a more uniform system of accounting that could be understood and relied upon by stakeholders. The ultimate aim was to improve the quality and consistency of financial information available for investment and credit decisions.11
Limitations and Criticisms
Despite its significant contributions, the Accounting Principles Board faced considerable criticism that ultimately led to its replacement. One major concern was the perception of a lack of independence, as the APB members were part-time volunteers who often retained their positions with accounting firms or corporations. This structure created potential conflicts of interest and led to perceptions that the board was influenced by its parent organization, the AICPA, or by the firms its members represented.10 Critics also pointed to the slow pace of issuing pronouncements and the limited number of Opinions produced during its 14-year existence.9 Furthermore, some of the APB's Opinions were accompanied by a large number of "qualified approvals" or dissents from board members, suggesting a lack of consensus and potentially weakening the authority of the pronouncements.8 These limitations, coupled with the increasing complexity of financial transactions and the growing demand for more robust and independent standard-setting, highlighted the need for a fully independent, full-time body, leading to the formation of the FASB.7
Accounting Principles Board (APB) vs. Financial Accounting Standards Board (FASB)
The key distinction between the Accounting Principles Board (APB) and the Financial Accounting Standards Board (FASB) lies primarily in their structure and independence. The APB, established by the AICPA, operated with part-time members who often had affiliations with accounting firms, leading to concerns about its autonomy and potential influence. In contrast, the FASB, which replaced the APB in 1973, was created as an independent, private-sector organization with full-time, compensated members who sever their ties with their previous employers upon joining. This structural change was designed to enhance the independence and perceived objectivity of the standard-setting process. The FASB also operates with a larger research staff and a more systematic due process, enabling it to issue a greater volume of comprehensive accounting standards compared to the APB.
FAQs
What was the main purpose of the Accounting Principles Board?
The primary purpose of the Accounting Principles Board (APB) was to establish and improve accounting standards and principles to ensure consistency, comparability, and reliability in financial reporting in the United States.6
Why was the APB replaced?
The APB was replaced in 1973 due to concerns regarding its independence, the part-time nature of its members, and the perceived slow pace and limited volume of its pronouncements. The aim was to create a more effective and independent standard-setting body, which became the Financial Accounting Standards Board (FASB).5,4
Did the APB set Generally Accepted Accounting Principles (GAAP)?
Yes, the Accounting Principles Board (APB) played a significant role in developing Generally Accepted Accounting Principles (GAAP) in the United States by issuing its authoritative "APB Opinions." These Opinions formed a substantial part of GAAP during its operational period.3
Are APB Opinions still relevant today?
While all APB Opinions have been superseded by the Financial Accounting Standards Board's Accounting Standards Codification, their foundational principles continue to influence modern accounting standards. Many concepts introduced by the APB are still embedded within current GAAP.,2
How many Opinions did the APB issue?
The Accounting Principles Board (APB) issued 31 "APB Opinions" during its existence from 1959 to 1973.1 These Opinions provided specific guidance on various auditing and accounting issues.