FASB: Financial Accounting Standards Board

August 31, 2024 3 min read Accounting Finance FASB GAAP Accounting Standards Financial Reporting Regulatory Authority

Comprehensive overview of the Financial Accounting Standards Board (FASB) and its role in establishing Generally Accepted Accounting Principles (GAAP).

On this page

The Financial Accounting Standards Board (FASB) is a private, non-profit organization that sets the Generally Accepted Accounting Principles (GAAP) in the United States. Established in 1973, FASB is recognized by the Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants (AICPA) as the authoritative body overseeing standards that govern financial reporting and accounting.

Role and Responsibilities

Establishing GAAP

The primary role of the FASB is to develop and refine GAAP, ensuring that financial statements are consistent, comparable, and transparent. GAAP encompasses a wide range of principles and standards that guide financial accounting practices in the U.S.

Improving Financial Reporting

FASB aims to continually improve the relevance and reliability of financial reporting. This involves the development of new standards and the revision of existing ones to account for changes in the business environment and advances in financial theory.

Enhancing Stakeholder Confidence

By upholding stringent standards for financial reporting, the FASB plays a critical role in enhancing stakeholders’ confidence in the financial statements they rely upon for decision-making.

Historical Context

Formation

FASB was formed following the recommendations of the Wheat Committee, which was established by the AICPA to address concerns about the lack of uniformity and transparency in financial reporting. Before the FASB, standards were set by the Accounting Principles Board (APB), which faced criticism for its slow response to emerging issues.

Evolution

Since its inception, the FASB has evolved to address the complexities of modern financial markets. It works in close coordination with other standard-setting bodies, like the International Accounting Standards Board (IASB), to foster global convergence of accounting standards.

Structure and Governance

Board Composition

The FASB is governed by a seven-member board, including professionals from various backgrounds—public accounting, academia, industry, and government. Each member serves a term of five years, renewable once.

Due Process

FASB follows a rigorous due process for standard-setting, which includes:

Identifying Issues: Gathering input from stakeholders to identify areas in need of new or revised standards.
Exposure Drafts: Publishing proposed standards for public comment.
Redeliberation: Considering feedback and making necessary adjustments.
Final Standards: Issuing final standards after thorough review and agreement.

Key GAAP Standards Issued by FASB

Revenue Recognition: ASC 606 outlines how entities should recognize revenue from contracts with customers.
Leases: ASC 842 provides guidelines for lease accounting, including recognition and measurement.
Financial Instruments: Standards such as ASC 815 pertain to accounting for derivatives and hedging.

GAAP (Generally Accepted Accounting Principles): A set of accounting standards and procedures used in the preparation of financial statements to ensure consistency and comparability.
SEC (Securities and Exchange Commission): A U.S. federal agency that oversees securities markets and enforces securities laws to protect investors.
IASB (International Accounting Standards Board): An independent body responsible for developing International Financial Reporting Standards (IFRS) used globally.

FAQs

Why is FASB important?

FASB’s standards are vital for ensuring that financial statements are accurate, comparable, and reliable, which facilitates investor trust and efficient capital markets.

How does FASB differ from IASB?

While FASB sets accounting standards for the U.S. (GAAP), IASB develops global standards known as IFRS. Both organizations work toward harmonizing their standards to reduce differences.

Who funds the FASB?

FASB is primarily funded through fees paid by publicly traded companies, which are collected by the Financial Accounting Foundation (FAF).

References

Financial Accounting Standards Board (2019). “About FASB.” Retrieved from https://www.fasb.org/facts/ab_facts.html
Securities and Exchange Commission (2019). “SEC’s Role in Accounting Standards.” Retrieved from https://www.sec.gov

Summary

The Financial Accounting Standards Board (FASB) is instrumental in shaping the landscape of financial reporting in the United States. By developing and maintaining GAAP, FASB ensures that the financial statements produced by public companies are trustworthy and comparable, facilitating informed decision-making by investors, regulators, and other stakeholders.