What Are Accounting Principles Board Opinions?
Accounting Principles Board Opinions are authoritative pronouncements issued by the Accounting Principles Board (APB), which served as the primary standard-setting body for Generally Accepted Accounting Principles (GAAP) in the United States from 1959 to 1973. These opinions were a critical component of accounting standards during their active period, providing guidance on a wide range of financial reporting issues. The APB's pronouncements aimed to clarify and interpret complex accounting topics, ensuring greater consistency and reliability in how companies presented their financial statements.
History and Origin
The Accounting Principles Board (APB) was established in 1959 by the American Institute of Certified Public Accountants (AICPA) to succeed the Committee on Accounting Procedure (CAP), which had faced criticism for its ad hoc approach to accounting issues. The APB's formation marked an effort to create a more structured and comprehensive framework for U.S. GAAP. From its inception, the APB aimed to develop a broad conceptual foundation for accounting principles. However, early attempts at a comprehensive theoretical framework were met with resistance due to their perceived radical departure from existing practices.13
During its operational period from 1959 to 1973, the APB issued 31 Accounting Principles Board Opinions, alongside four Statements. Its initial pronouncement, APB Opinion No. 1, was issued in November 1962, offering guidance on new tax depreciation rules.12 Despite some early challenges, including an instance where its second opinion was effectively overruled by the Securities and Exchange Commission (SEC), the APB's work was instrumental in shaping corporate financial reporting.11 The APB included active accounting professionals who incorporated their practical knowledge into the opinions, contributing to a significant transformation of accounting practices in the mid-20th century, especially as investor demands for consistent information grew after the stock market crash of 1929. By 1973, concerns about the APB's perceived lack of independence and its slow responsiveness to emerging accounting issues led to its replacement by the Financial Accounting Standards Board (FASB).10,9
Key Takeaways
- Accounting Principles Board Opinions were authoritative pronouncements issued by the APB, the predecessor to the FASB, from 1959 to 1973.
- These opinions aimed to provide definitive guidance on accounting issues and contributed significantly to the development of U.S. Generally Accepted Accounting Principles.
- The APB issued 31 opinions, some of which continue to be relevant and are incorporated into the modern Accounting Standards Codification (ASC).
- The APB was replaced due to criticisms regarding its independence and perceived slowness in addressing complex accounting matters.
- Despite their eventual supersession by FASB pronouncements, Accounting Principles Board Opinions laid foundational groundwork for many current accounting practices.
Interpreting Accounting Principles Board Opinions
When interpreting Accounting Principles Board Opinions, it is crucial to understand their historical context and current applicability. While many of the original 31 opinions have been superseded or amended by subsequent FASB Statements, a significant number of their provisions were carried forward and are still embedded within the modern Accounting Standards Codification. Therefore, a thorough interpretation often involves tracing the evolution of a particular accounting standard from an APB Opinion through subsequent FASB pronouncements to its current form within the ASC.
For example, an opinion might clarify the accounting treatment for certain assets or liabilities, or dictate how specific transactions should be recorded. Accountants and financial professionals studying historical financial data or addressing legacy accounting issues may still refer to these opinions to understand the basis of past practices or the development of current standards. The principles articulated within Accounting Principles Board Opinions provided foundational insights into areas like business combinations, income taxes, and leases, influencing how these items are presented in a company's financial position.
Hypothetical Example
Consider the accounting treatment of goodwill from a business acquisition. Before the APB, accounting for such transactions could vary widely. APB Opinion No. 16, "Business Combinations," issued in 1970, and APB Opinion No. 17, "Intangible Assets," were significant.
Imagine Company A acquires Company B. Under APB Opinion No. 16, Company A would have had to choose between two methods for accounting for the acquisition: the pooling of interests method or the purchase method.
If the pooling of interests method was used (which has since been eliminated by FASB), the financial statements of the two companies would have been combined retrospectively, as if they had always been a single entity. No goodwill would be recognized in this scenario.
However, if the purchase method was applied (the current standard approach), Company A would record Company B's assets and liabilities at their fair values, and any excess of the purchase price over the fair value of net identifiable assets would be recognized as goodwill. APB Opinion No. 17 then specified that this goodwill should be amortized over a period not exceeding 40 years. This hypothetical demonstrates how Accounting Principles Board Opinions directly influenced the accounting practices for major corporate events like mergers and acquisitions.
Practical Applications
Accounting Principles Board Opinions historically served as the authoritative guidance for preparing financial statements for public companies in the U.S. They addressed diverse topics that directly impacted how financial information was presented to investors and other stakeholders. For instance, APB Opinion No. 15 focused on the calculation and presentation of earnings per share, a crucial metric for investors evaluating a company's profitability. Other opinions provided guidance on preparing consolidated financial statements, accounting for stock options, and reporting changes in financial position.8,
While the FASB has since taken over the standard-setting role, many core principles from Accounting Principles Board Opinions have been retained and integrated into the modern Accounting Standards Codification. This means that their influence persists in the underlying logic of current GAAP rules. For example, APB Opinion No. 29 on nonmonetary transactions established that such exchanges should generally be valued at fair value, a principle that continues to guide accounting for these types of exchanges today. The Securities and Exchange Commission (SEC) has historically overseen private-sector accounting standard setters like the APB, playing a crucial role in ensuring that established accounting standards contribute to transparent and reliable financial reporting in U.S. capital markets.7,6
Limitations and Criticisms
Despite their significant contributions, Accounting Principles Board Opinions faced several limitations and criticisms that ultimately led to the APB's dissolution. A primary concern was the APB's perceived lack of independence. Its members, who served part-time, often maintained ties to their accounting firms or industries, leading to accusations of potential conflicts of interest and a lack of neutrality in standard-setting.5, This structure made it difficult for the APB to respond quickly and comprehensively to complex or controversial accounting issues, sometimes resulting in a slow and ad hoc approach to standard-setting rather than developing a robust conceptual framework.4
Another significant critique was the APB's inability to sufficiently reduce alternative accounting principles, meaning that companies still had multiple acceptable ways to account for certain transactions, which could hinder comparability across firms. For example, APB Opinion No. 2, concerning the "investment credit," was largely ignored by the profession due to the SEC's effective overruling, highlighting the challenges the APB faced in gaining universal acceptance for its pronouncements.3 Critics, such as Abraham Briloff, even referred to the APB as the "Accounting Pragmatics Board" due to its perceived practical rather than principled approach. The consensus-driven, part-time nature of the APB was seen as less effective compared to the more independent, full-time model adopted by its successor, the Financial Accounting Standards Board.2
Accounting Principles Board Opinions vs. FASB Statements
The primary difference between Accounting Principles Board Opinions and FASB Statements lies in the issuing body and their respective eras of authority in U.S. accounting standard-setting. Accounting Principles Board Opinions were pronouncements of the Accounting Principles Board (APB), which operated from 1959 to 1973. During this period, these opinions formed the bedrock of Generally Accepted Accounting Principles.
In contrast, FASB Statements (now largely integrated into the Accounting Standards Codification) are issued by the Financial Accounting Standards Board (FASB), which replaced the APB in 1973. The FASB was established as a fully independent, private-sector organization with full-time members, aiming to overcome the criticisms of the APB, particularly concerning its independence and responsiveness. While many APB Opinions laid the groundwork, FASB Statements introduced a more rigorous and transparent due process for standard-setting, and they continually update and supersede prior guidance, including many of the original APB Opinions.
FAQs
What is the significance of Accounting Principles Board Opinions today?
Although most Accounting Principles Board Opinions have been superseded by FASB Statements and integrated into the Accounting Standards Codification, their significance lies in their historical role as foundational elements of Generally Accepted Accounting Principles. Many current accounting practices are direct descendants of the principles first articulated in these opinions, making them important for understanding the evolution of U.S. accounting standards.
How many Accounting Principles Board Opinions were issued?
The Accounting Principles Board (APB) issued a total of 31 Accounting Principles Board Opinions during its operational period from 1959 to 1973.,1 In addition to these opinions, the APB also issued four Statements.
Why was the Accounting Principles Board replaced?
The Accounting Principles Board (APB) was replaced by the Financial Accounting Standards Board (FASB) in 1973 due to growing criticisms regarding its effectiveness and independence. Concerns included its part-time board members, perceived lack of responsiveness to emerging issues, and an inability to sufficiently reduce the number of alternative accounting practices available to companies. The FASB was designed to be a more independent, full-time body dedicated solely to setting accounting standards.