Financial accounting standards board|

What Is the Financial Accounting Standards Board (FASB)?

The Financial Accounting Standards Board (FASB) is an independent, private-sector, not-for-profit organization responsible for establishing and improving financial accounting and financial reporting standards in the United States. These standards, known as Generally Accepted Accounting Principles (GAAP), are followed by publicly traded companies, private companies, and non-profit organizations when preparing their financial statements. The FASB operates within the broader category of financial accounting, aiming to provide decision-useful information to investors and other stakeholders. Its authoritative standards are recognized by the U.S. Securities and Exchange Commission (SEC) as the designated accounting standard-setter for public companies.³²

History and Origin

The Financial Accounting Standards Board was established in 1973, emerging from a critical need for enhanced consistency and accuracy in financial reporting.³¹ It succeeded the Accounting Principles Board (APB), which had served a similar purpose from 1959 to 1973.³⁰ The creation of the FASB marked a significant turning point in U.S. accounting, born out of a period characterized by accounting scandals and financial crises that underscored the necessity for more robust and trustworthy financial information.²⁸, ²⁹ The FASB is supported and overseen by the Financial Accounting Foundation (FAF), an independent, private-sector, not-for-profit organization established in 1972.²⁷ To foster independence, the seven full-time members of the FASB are required to sever connections with prior firms or institutions.²⁶ In 2002, the FASB began a convergence project with the International Accounting Standards Board (IASB) to harmonize U.S. GAAP with International Financial Reporting Standards (IFRS), aiming for a single set of high-quality global accounting standards.²⁵ This initiative culminated in significant updates, such as the joint issuance of new guidance on revenue recognition in 2014, known as ASC 606.²³, ²⁴

Key Takeaways

• The FASB is the primary private-sector organization responsible for setting accounting standards (GAAP) for non-governmental entities in the United States.
• It was established in 1973 to enhance the consistency, transparency, and accuracy of financial reporting.
• The SEC recognizes the FASB as the official accounting standard setter for public companies.
• The FASB continually updates GAAP through a rigorous, transparent process to respond to evolving business practices and financial markets.
• A key objective of the FASB's standards is to provide decision-useful information to investors and other users of financial reports.

Interpreting the FASB

The FASB does not interpret financial results directly, but rather establishes the authoritative framework—GAAP—under which companies must prepare and present their financial statements. Therefore, interpreting "the FASB" involves understanding its role in shaping how financial information is communicated. When a company's financial results are presented, they are done so in accordance with the standards set by the FASB. For example, specific FASB Accounting Standards Codification (ASC) topics dictate how transactions, such as the recognition of revenue or the valuation of assets and liabilities, are to be reported on the income statement, balance sheet, and cash flow statement. Users of financial reports, including investors and analysts, rely on the consistency and comparability provided by FASB's standards to make informed decisions.

##²² Hypothetical Example

Imagine a technology startup, "InnovateTech Inc.," that signs a contract with a client for a software license and ongoing technical support. Prior to 2018, different companies might have recognized revenue from such a bundled contract inconsistently. However, with the implementation of FASB's ASC 606 (Topic 606, Revenue from Contracts with Customers), InnovateTech Inc. must follow a five-step model for revenue recognition.

1. Identify the contract with a customer: InnovateTech confirms the valid contract.
2. Identify the performance obligations in the contract: InnovateTech determines it has two distinct performance obligations: delivering the software license and providing ongoing technical support.
3. Determine the transaction price: The total price for the software and support is $120,000.
4. Allocate the transaction price to the performance obligations: Based on standalone selling prices, InnovateTech allocates $100,000 to the software license and $20,000 to the technical support.
5. Recognize revenue when (or as) the entity satisfies a performance obligation: InnovateTech recognizes the $100,000 for the software license upon delivery, as control transfers at that point. The $20,000 for technical support is recognized ratably over the 12-month service period.

This application of ASC 606, a standard set by the FASB, ensures that InnovateTech's financial statements accurately reflect when economic value is transferred to the customer, promoting transparency and comparability with other software companies.

Practical Applications

The standards set by the Financial Accounting Standards Board have pervasive practical applications across the U.S. financial landscape. They are fundamental to how public and private entities structure their accounting practices. For instance, the FASB's Accounting Standards Codification (ASC) provides the detailed guidance that accountants follow when preparing financial statements. A significant example is ASC 606, the standard for revenue recognition, which changed how companies report income from contracts with customers, ensuring greater consistency across various industries. Thi²⁰, ²¹s standard, effective for public companies in fiscal years beginning after December 15, 2017, and for private companies a year later, significantly impacts how diverse businesses, from software providers to manufacturers, record their sales. Fur¹⁸, ¹⁹thermore, FASB standards are critical for auditing processes, as auditors verify that a company's financial statements conform to GAAP, providing assurance to investors and regulators. The SEC explicitly recognizes the FASB's authority in setting these standards for publicly traded companies, underscoring their regulatory importance in protecting investors and maintaining efficient markets.

##¹⁶, ¹⁷ Limitations and Criticisms

Despite its crucial role, the Financial Accounting Standards Board and the GAAP framework it maintains have faced limitations and criticisms. One common critique revolves around the complexity and rules-based nature of GAAP, with some arguing it can be overly prescriptive and less adaptable than principles-based standards like IFRS. Cri¹⁴, ¹⁵tics also suggest that GAAP, and thus FASB's standards, do not always adequately capture the fair value of certain assets or provide the most relevant information for investors, leading some companies to provide "non-GAAP" financial metrics. Res¹³earch has even questioned the direct benefit of many FASB standards to shareholder value. A study examining 138 standards issued by the FASB between 1973 and 2009 found that only a small percentage (11%) increased shareholder value, while the majority had no discernible effect. Som¹²e argue that the private nature of the FASB, while intended to foster independence, can sometimes lead to standards that may not fully align with the broader public interest or lead to perceived political influences. The¹¹se ongoing discussions highlight the challenge of balancing comprehensive and consistent financial reporting with the dynamic needs of capital markets and various stakeholders.

Financial Accounting Standards Board (FASB) vs. Governmental Accounting Standards Board (GASB)

The Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) are both independent organizations that establish accounting and financial reporting standards in the United States. While they share a common goal of ensuring transparency and accountability in financial reporting, their scopes of authority differ significantly.

The confusion between the two often arises because both are "standard-setting boards" in the realm of U.S. financial accounting, but their distinct purviews—commercial/non-profit versus state/local government—lead to different accounting principles tailored to the specific needs of their respective users.

FAQs

What is the main purpose of the Financial Accounting Standards Board?

The main purpose of the FASB is to establish and improve financial accounting and reporting standards, known as GAAP, to provide useful financial information to investors and other users of financial reports.

Is⁶ the FASB a government agency?

No, the FASB is an independent, private-sector, not-for-profit organization. While it is recognized by the U.S. Securities and Exchange Commission as the designated accounting standard-setter for public companies, it is not a government agency.

Ho⁴, ⁵w does the FASB ensure its independence?

To foster independence, the seven full-time members of the FASB are required to sever their connections with any firms or institutions they served before joining the Board. The FAS³B also operates under the oversight of the Financial Accounting Foundation (FAF), an independent private-sector organization.

Wh²at are Generally Accepted Accounting Principles (GAAP)?

Generally Accepted Accounting Principles (GAAP) are a common set of accounting standards and procedures that companies in the United States must follow when compiling their financial statements. The FASB is responsible for setting and updating these principles.

How often does the FASB issue new standards?

The FASB continuously monitors and updates GAAP. It issues new or amended standards, known as Accounting Standards Updates (ASUs), as needed to address emerging financial reporting issues and improve existing guidance. The frequency varies depending on the complexity and urgency of the issues being addressed.¹