APB (Accounting Principles Board): The Precursor to the FASB

An in-depth exploration of the Accounting Principles Board (APB), its history, function, significance, and eventual replacement by the Financial Accounting Standards Board (FASB).

The Accounting Principles Board (APB) was a body established by the American Institute of Certified Public Accountants (AICPA) tasked with developing accounting principles and issuing guidelines and opinions to shape and standardize accounting practices. It was operational from 1959 until it was replaced by the Financial Accounting Standards Board (FASB) in 1973. The objective of APB was to advance the written expression of generally accepted accounting principles (GAAP) and to establish an authoritative accounting pronouncements that would improve the quality and reliability of financial reporting.

Historical Context

Establishment and Purpose

The APB was created during an era when the need for standardized accounting practices was increasingly evident. Many organizations and businesses were growing, necessitating more complex and uniform accounting procedures.

Objectives:

• To develop an overall conceptual framework for accounting principles.
• To reduce the number of acceptable accounting alternatives.
• To narrow inconsistencies in financial statements.

Contributions and Outcome

Over its 14 years of existence, the APB issued 31 APB Opinions, various statement papers, and interpretations, which significantly influenced accounting practices and the evolution of GAAP in the United States.

Structure and Functioning

Organizational Setup

APB was composed of 18 to 21 members who were primarily accountants from public practice, representatives from industry, academia, and government, thus ensuring a diverse perspective on the principles being developed.

Deliberative Process

The APB followed a comprehensive process of principle formulation which included:

• Research and Analysis: Conducting extensive research on accounting issues.
• Public Exposure: Drafting of proposed principles was exposed to public commentary.
• Deliberative Meetings: Holding meetings to discuss and deliberate on the feedback received.
• Final Pronouncements: Issuance of final APB Opinions which were authoritative guidances.

Special Considerations

Criticisms and Limitations

Despite its contributions, APB faced significant criticism:

• Ambiguity: Some opinions were seen as ambiguous and lacking in clear guidelines.
• Independence Issues: Questions were raised about the independence of its members, as many were practitioners who could be subject to conflicts of interest.
• Complexity: The increasing complexity of transactions outpaced the board’s ability to provide timely and relevant guidance.

Replacement by the FASB

In response to the criticism and a growing need for a more robust standard-setting entity, the APB was disbanded in 1973, and the Financial Accounting Standards Board (FASB) was established. The FASB, with a more structured and transparent procedure, aimed to further the goals of APB and enhance the quality of accounting standards.

Comparisons and Related Terms

APB vs. FASB

• APB: Less structured, faced criticism for ambiguity and independence.
• FASB: Structured framework, clear guidelines, greater transparency, and independence.

Related Terms

Generally Accepted Accounting Principles (GAAP): A framework of accounting standards, principles, and procedures issued by the FASB and its predecessors.

Financial Accounting Standards Board (FASB): The entity that succeeded APB and continues to set accounting standards in the United States.

FAQs

Why was the APB replaced by the FASB?

The APB was replaced by the FASB due to criticisms regarding its lack of independence, ambiguous guidance, and the increasing complexity of accounting practices which required a more structured and transparent approach.

How did APB opinions influence modern accounting?

APB Opinions laid the groundwork for many of the principles that are still in use today and helped to formalize the practice of standardized accounting procedures.

What is an APB Opinion?

An APB Opinion is an authoritative guidance issued by the APB during its tenure addressing specific accounting issues and practices.

References

1. American Institute of Certified Public Accountants (AICPA). Historical context and documents related to APB.
2. Financial Accounting Standards Board (FASB). “History of the FASB”: www.fasb.org
3. Zeff, S. A. “The Rhetoric and the Reality: Harbingers of Pressure on the Financial Accounting Standards Board.” The Accounting Review, Vol. 63, No. 3 (1988): pp. 475-501.

Summary

The Accounting Principles Board (APB) played a pivotal role in the development and standardization of accounting practices in the United States from 1959 to 1973. Despite facing criticism, the APB established foundational principles that guided accounting practices and paved the way for its successor, the Financial Accounting Standards Board (FASB), to continue the task of improving financial reporting and transparency. The legacy of APB’s work is visible in modern accounting standards and regulations.