In accounting, transparency is everything. If each company decided how to report its financial status, no one would be able to judge one company against another. How would one know if a company was earning money, or which companies would make a good investment? This is where the Financial Accounting Standards Board (FASB) comes in.
The FASB was established in 1973 by the Financial Accounting Foundation (FAF) to set standards for financial reporting. The FAF is a private organization whose primary duty is to protect the integrity and independence of financial accounting standards in the United States. It does this by remaining independent of any business, government agency or professional organization.
The FASB issues guidance in the form of Statements of Financial Accounting Standards (SFAS). These statements cover a wide range of topics such as how to account for mergers, derivatives and investments, just to name a few.
Why do companies agree to follow the standards set by FASB? The Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants officially recognize the standards set by FASB. Therefore, SEC-registered companies are obliged to conform to FASB standards, which are also known as GAAP (Generally Accepted Accounting Principles).
Prior to 2009, FASB statements were numbered chronologically according to date of issuance. As of September 15, 2009, all FASB statements were reorganized by topic and subtopic, along with other accepted accounting standards. There are now approximately 90 broad topics and many subtopics which are known as Accounting Standards Codifications (ASC). This reclassification provides a single source and makes it much easier to find guidance on specific subjects.
The process for issuing guidance statements is quite rigorous and thorough. Once an issue is identified and selected by the FASB chairman as an appropriate project, it is investigated by staff and then reviewed at one or more public meetings. The board then issues an "exposure draft" of a standard to address the issue, and solicits public comment. It may also hold a public roundtable meeting. The staff analyzes comment letters and roundtable meeting discussion. The board deliberates over all input received, and then finalizes a new Accounting Standards Update.
- Financial Accounting Standards Board: Facts About FASB
- Bloomberg: "FASB Backs Off Fair-Value of Loans Proposal After Opposition"; January 25, 2011
- Accounting Standards Codification® Notice to Constituents (v 4.2)
- Photo Credit Creatas/Creatas/Getty Images