What Is Financial Accounting Foundation?
The Financial Accounting Foundation (FAF) is an independent, private-sector, not-for-profit organization responsible for the oversight, administration, financing, and appointment of the primary accounting standard-setting bodies in the United States. These bodies are the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).19 The FAF falls under the broader financial category of accounting regulation. Its fundamental mission is to ensure that both the FASB and GASB establish and improve high-quality financial accounting and reporting standards, known as Generally Accepted Accounting Principles (GAAP), that provide decision-useful information to investors and other users of financial reports.18 The Financial Accounting Foundation plays a crucial role in maintaining the integrity and objectivity of financial reporting.
History and Origin
The Financial Accounting Foundation was organized in 1972 as a non-stock, Delaware Corporation. Its creation stemmed from a need to enhance the independence and objectivity of accounting standard-setting in the U.S., following various accounting-related lawsuits in the late 1960s. In May 1972, the American Institute of Certified Public Accountants (AICPA) considered the "Wheat Report," which recommended replacing the existing Accounting Principles Board (APB) with a new, independent Financial Accounting Standards Board (FASB). The report also proposed the establishment of the Financial Accounting Foundation with trustees to select FASB members. The FAF was officially founded on June 30, 1972, with the FASB beginning operations in 1973.17
In 1984, the FAF extended its oversight by creating the Governmental Accounting Standards Board (GASB) to set standards for state and local governments, while the FASB continued to focus on private entities. This expansion further solidified the Financial Accounting Foundation's role in the comprehensive landscape of U.S. accounting standards.
Key Takeaways
- The Financial Accounting Foundation is a private, not-for-profit organization that oversees U.S. accounting standard-setting.16
- It is responsible for the administration, financing, and appointment of members to the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).15
- The FAF ensures the independence and integrity of the standard-setting process for Generally Accepted Accounting Principles (GAAP).14
- Its funding primarily comes from accounting support fees paid by publicly traded companies and municipal bond brokers, as well as publishing revenue and investment income.13
Interpreting the Financial Accounting Foundation
The Financial Accounting Foundation does not issue accounting standards directly but rather ensures the operational effectiveness and independence of the FASB and GASB. Understanding the FAF involves recognizing its governance and oversight functions. Its role is to protect the objectivity of the accounting standards set by its boards. The FAF's Board of Trustees, comprising individuals from diverse backgrounds including users, preparers, and auditors of financial statements, ensures a balanced perspective in the oversight process.12 The FAF also conducts periodic reviews, such as the Post-Implementation Review (PIR) process, to evaluate the effectiveness of the standards set by the FASB and GASB, demonstrating its commitment to continuous improvement in financial reporting.11
Hypothetical Example
Imagine a scenario where a significant shift in business practices, such as the rise of cryptocurrency transactions, creates a need for new accounting guidance. The Financial Accounting Foundation, through its oversight role, would ensure that the FASB, or potentially the GASB for governmental entities, initiates a thorough due process to address this emerging area. This would involve issuing discussion papers, holding public hearings, and gathering input from various stakeholders, including investors and preparers of financial statements. The FAF's role is to ensure this process is robust, transparent, and ultimately results in high-quality, unbiased accounting rules that accurately reflect the economic realities of these new transactions.
Practical Applications
The Financial Accounting Foundation's work has practical applications across various facets of finance:
- Investment Decisions: By ensuring robust and transparent accounting principles, the FAF indirectly supports investors in making informed decisions. Consistent and comparable financial statements, derived from GAAP, provide reliable data for financial analysis.
- Corporate Governance: The FAF's oversight of standard-setting contributes to strong corporate governance practices by promoting accountability and transparency in financial reporting.
- Regulatory Compliance: The FAF's standards are integral to regulatory compliance for public companies, as the FASB's standards are recognized by the U.S. Securities and Exchange Commission (SEC) as the designated accounting standard setter.10
- Public Sector Accountability: The GASB, under the FAF's purview, sets standards for state and local governments, fostering accountability and transparency in public sector financial reporting, which is vital for municipal bonds and public finance.
Limitations and Criticisms
While generally recognized for its vital role, the Financial Accounting Foundation and its related boards have faced some limitations and criticisms. One area of ongoing discussion revolves around the independence of the standard-setting process. Concerns have been raised, for instance, about the potential for industry influence on standard-setting bodies, despite the FAF's efforts to ensure objectivity.9 In 2021, over 30 organizations and individuals urged the SEC to reconstitute the FASB and FAF to include a majority of investor members, arguing that the entities had been too lenient towards businesses and the accounting and auditing industry at the expense of investors.8
Another point of critique can be the complexity of certain accounting standards issued by the FASB and GASB, which can sometimes be challenging for smaller entities or non-experts to implement and interpret. The FAF, through initiatives like the Private Company Council (PCC), aims to address the needs of private companies within GAAP, but navigating intricate rules remains a challenge for some.7 Maintaining a balance between comprehensive, high-quality standards and practical applicability for all entities is an ongoing effort.
Financial Accounting Foundation vs. FAFSA
The term "Financial Accounting Foundation" is sometimes confused with "FAFSA," primarily due to the similar acronym. However, these two terms refer to entirely different entities and concepts. The Financial Accounting Foundation is a private-sector organization responsible for overseeing the creation of accounting standards for businesses and governments in the United States. Its focus is on ensuring reliable and transparent corporate financial statements and public sector financial reports.
In contrast, FAFSA stands for the Free Application for Federal Student Aid.6 This is a form completed by current and prospective college students in the United States to determine their eligibility for various forms of financial aid, including grants, scholarships, work-study programs, and federal student loans.5 While both involve "financial" aspects, one deals with the rules for financial reporting by entities, and the other relates to individual student financing.
FAQs
What is the primary purpose of the Financial Accounting Foundation?
The primary purpose of the Financial Accounting Foundation is to oversee, administer, and finance the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB), ensuring they establish high-quality, independent financial accounting and reporting standards.4
How is the Financial Accounting Foundation funded?
The Financial Accounting Foundation is primarily funded through accounting support fees paid by publicly traded companies (for FASB) and certain municipal bond brokers and dealers (for GASB), as well as through publishing revenue and investment income.3
What are the main boards overseen by the Financial Accounting Foundation?
The main boards overseen by the Financial Accounting Foundation are the Financial Accounting Standards Board (FASB), which sets standards for public and private companies and not-for-profit organizations, and the Governmental Accounting Standards Board (GASB), which sets standards for state and local governments.2
Does the Financial Accounting Foundation set accounting standards?
No, the Financial Accounting Foundation itself does not set accounting standards. Its role is one of governance and oversight, ensuring that its two independent standard-setting boards, the FASB and GASB, establish and improve Generally Accepted Accounting Principles (GAAP).1
Where is the Financial Accounting Foundation located?
The Financial Accounting Foundation is based in Norwalk, Connecticut, United States.