The critical task of setting account standards in the world’s most dynamic economy is the responsibility of the Financial Accounting Standards Board (FASB).For most of the 19th and 20th centuries, the United States struggled to build an effective structure for creating and implementing consistent accounting standards that would provide reliable, transparent and comparable financial data to capital markets participants. By the 1970s, market participants agreed that the U.S. needed an independent, authoritative body to administer this critical task. In 1973, the FASB was born as the private, not-for-profit organization dedicated to setting the financial accounting standards that collectively are known as U.S. Generally Accepted Accounting Principles, or U.S. GAAP.“The FASB was created to stand apart from partisanship and momentary shifts in public opinion precisely because the value of accounting standards comes in the consistency of their application over time and circumstance.” – The Washington Post, March 26, 2009The FASB derives its authority to set accounting standards from the U.S. Securities and Exchange Commission (SEC). The standards issued by the FASB are officially recognized as authoritative by the SEC, as well as the American Institute of Certified Public Accountants (AICPA). Investors, lenders, and other users of financial information rely on financial reporting based on U.S. GAAP to make decisions about how they allocate their capital and to help financial markets operate as efficiently as possible.The mission of the FASB is to establish and improve financial accounting and reporting standards to provide decision-useful information to investors and other users of financial reports. The FASB’s mission is achieved through an open and independent process that encourages broad participation from all stakeholders and objectively considers and analyzes all their views. The FASB’s due process is subject to oversight by the Financial Accounting Foundation (FAF) Board of Trustees.
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Structure of the FASB
The FASB is one component of a non-profit standard-setting group that is autonomous of any business or government body. This group includes the FAF, the FASB, the Financial Accounting Standards Advisory Council (FASAC), the Governmental Accounting Standards Board (GASB), and the Governmental Accounting Standards Advisory Council (GASAC).The FASB comprises seven full-time board members that are appointed by the FAF Board of Trustees. Members may serve up to two five-year terms. A professional staff of more than 60 people supports the FASB. Board members and staff are focused on the needs of investors, other capital markets participants, and the public interest when it comes to financial accounting and reporting. They all possess a background in investing, accounting, finance, education and research. To maintain their independence, members and staff must abide by restrictions on personal investments and other activities in order to avert potential conflicts of interest.The FASAC is a key part of the FASB’s work. The FASAC comprises corporate executives, senior partners of public accounting firms, executive directors of professional organizations and senior members of the academic and analyst communities. The group counsels the FASB on accounting and financial issues on the FASB’s agenda, new agenda items and other issues. The FASAC has more than 30 members.“In recognition of the … consensus-building nature of its mandate, the FASB’s process for issuing an accounting standard elicits widespread, thoughtful responses. The process is completely public. Repeated rounds of exposure drafts encourage wide participation… As a result of the open, elaborate standard-setting process, FASB’s standards incorporate diverse points of view in an acceptable political consensus.” – Regina E. Herzlinger, Harvard professor via House Ways and Means Committee’s Health Subcommittee hearing, July 18, 2006The non-profit FASB is funded primarily through accounting support fees, which are paid by U.S. corporations that issue publicly-traded securities. This funding method was written into the Sarbanes-Oxley Act of 2002, as amended (the Sarbanes-Oxley Act). The FASB also receives revenue from the sales of subscriptions and publications.
The FASB’s Standard-Setting Process
The FASB utilizes a proven, independent due process method to constantly improve accounting standards. The process is designed to collect a variety of viewpoints from those who prepare and use financial reports. While this process may vary slightly based on any particular project, following is an overview of how the FASB generally operates:
The FASB’s Current Priorities
While the FASB’s ongoing mission remains constant, the group’s projects change with the times. The FASB works continually to keep accounting standards out in front of economic and business trends. This ensures that financial reports reflect current realities.For a complete list of FASB projects underway, visit www.fasb.org. Some of the key projects currently underway at the FASB include:“The U.S. has been a positive influence bringing authority and expertise in accounting matters. That influence would also benefit global markets and investors by countering the growing cloud of countries that may pursue less capital-market oriented goals with financial reporting.” – Bloomberg, June 24, 2011.The convergence of U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS): The FASB is working to address the need for more consistent, transparent and converged financial accounting standards across the world. For the past ten years, the FASB has been collaborating with the International Accounting Standards Board (IASB), the body responsible for the development of International Financial Reporting Standards (IFRS), to reconcile fundamental differences between U.S. GAAP and IFRS. The FASB’s goal remains improving the quality of financial reporting in the U.S. while advancing global comparability of financial reporting.
Revenue is an important indicator for users of financial reports in assessing a company’s performance and prospects. However, revenue recognition guidance differs in U.S. GAAP and IFRS, and many believe both are in need of improvement. The revenue recognition project seeks to improve financial reporting by developing a single, converged revenue standard for U.S. GAAP and IFRS. The Boards are expected to issue a final standard in 2013.
Leases are an important source of financing for many companies that lease assets. However, many lease transactions currently are not reported on the balance sheet. The objective of the leases project is to increase transparency and comparability among organizations that lease assets by recognizing assets and liabilities that arise from lease transactions on a lessee’s balance sheet. The Boards issued for public comment a revised Exposure Draft on Leases in May 2013.
The objective of the joint project on accounting for financial instruments is to provide financial statement users with a more timely and representative depiction of a company, institution, or not-for-profit organization’s involvement in financial instruments, while reducing the complexity in accounting for those instruments. The Boards are conducting this project in three phases, and both have issued proposed standards on the first two phases: accounting for credit losses and recognition and measurement of financial instruments. Both Boards have proposed expected credit loss models to replace the current incurred loss model, but their proposed models differ on when those losses should be recognized. Following the conclusion of the comment period on credit losses, the Boards will determine whether there is common ground in developing a converged standard. On the issue of classification and measurement, the Boards are converged on the major decisions, and expect to deliberate during the second half of 2013. The third phase of the accounting for financial instruments project looks at hedging. The IASB issued its proposal on hedging in September 2012. The FASB is expected to begin its deliberations on hedging during the second half of 2013.
Existing U.S. GAAP comprehensively addresses insurance accounting. However, IFRS currently lacks specific accounting requirements for insurance contracts. The Boards undertook the Insurance Contracts project to develop common, high-quality guidance that will address recognition, measurement, presentation, and disclosure requirements for insurance contracts (including reinsurance), even if the contracts are not issued by an insurance company. In general, the Boards are developing a model that would reflect current estimates of the amount necessary to fulfill an insurance obligation. However, they have not reached consistent conclusions about some elements of the model. The FASB published an Exposure Draft in June 2013.
The FASB began working with the Private Company Council in 2012 to address standard-setting issues raised by private company stakeholders. Established in 2012 by the FAF, the PCC is responsible for determining whether and when to develop modifications to U.S. GAAP for private companies. The PCC also serves as the primary advisory body to the FASB on the appropriate treatment for private companies for standards under active consideration on the FASB’s technical agenda. In June, the FASB voted to endorse and expose for public comment three alternatives within U.S. GAAP proposed by the PCC to address concerns raised about the relevance and complexity of certain aspects of GAAP for private company stakeholders. The proposals involve accounting for intangible assets acquired in business combinations, goodwill, and certain types of interest rate swaps.
Created in late 2010, the Not-for-Profit Advisory Committee (NAC) submitted its recommendations to the FASB on how to refresh the current not-for-profit reporting model. While NAC members express satisfaction with the current model, they offered a number of suggestions for improving the information not-for-profit financial statements provide to donors and other users. The FASB responded by adding both a standard setting and a research project to its agenda. The standard-setting project seeks to improve the current net asset classification scheme and information provided in financial statements and notes about an organization’s liquidity, financial performance, and cash flows. The research project will study other means of communication that not-for-profit organizations currently use in telling their financial story.For 40 years, the FASB has undertaken these and many other projects with one goal in mind: the continual improvement of accounting standards to provide decision-useful information to investors and other users of financial reports. In a world where capital markets are filled with risk and volatility, the FASB’s singular dedication to this goal is more important than ever.