Financial Accounting Standards Board (FASB)

An independent organization that is responsible for establishing accounting standards for financial reporting within the U.S.

What is the Financial Accounting Standards Board (FASB)?

The Financial Accounting Standards Board (FASB) is an independent organization that exists in the private sector. It is responsible for establishing accounting standards for financial reporting within the U.S. and follows FASB Standards, also known as Generally Accepted Accounting Principles (GAAP).

 

Financial Accounting Standards Board (FASB)

 

In order to establish universal accounting standards, the Financial Accounting Standards Board coordinates with the International Accounting Standards Board (IASB), which is responsible for the International Financial Reporting Standards (IFRS).

 

History of the Financial Accounting Standards Board

Established in 1973, the Financial Accounting Standards Board (FASB) was originally created to step in the shoes of the Accounting Principles Board, which served the same purpose as FASB from 1959 to 1973.

FASB is part of an independent structure that also contains the Financial Accounting Foundation, the Financial Accounting Standards Advisory Council (FASAC), the Governmental Accounting Standards Advisory Council (GASAC), and the Governmental Accounting Standards Board (GASB).

Collectively, they work to improve financial reporting within the U.S. while also enabling and educating stakeholders on reading and understanding the accounting standards. It is not only useful to investors but also important to the market.

 

Functions of the Financial Accounting Standards Board

The FASB performs a wide range of functions, ranging from creating new principles to educating the general public

 

1. Establish reporting standards

The FASB’s most important function is to ensure that accountants and other intermediaries involved in handling financial information create detailed reports, which are then shared with stakeholders. Following a consistent set of standards enables a more efficient market and economy.

 

2. Improve accounting standards

The FASB’s mission, advertised strongly on their website, is to continuously update and enable accountants to work with better accounting principles. In the 21st century, the FASB is looking into how technology interacts with the field of accounting so it can utilize some of the benefits it may bring to the world of accounting.

 

3. Ensure information is transparent and useful for investors

In capital markets, it is necessary for investors to receive information surrounding a company’s profits and losses. A recent change made by the FASB allows companies to restrict the information that is conveyed to the investors, which may not be as relevant. The rule applies more to biotech and drug companies who conduct trials and testing phases, which may not be as relevant to investors besides the impact of the finished product itself.

 

4. Create new accounting principles

The FASB is responsible for creating new principles that improve the system. An example of a newly created accounting principle is the disclosure principle, which gives a company the right to publicize its details and structure of costs incurred in the year.

 

5. Enable the general public to be educated on accounting standards

Professionals undergo years of education in order to truly understand the already existing principles and accounting standards. However, FASB makes sure to continually educate and update the knowledge and expertise of its accountants and other professionals to uphold its mission and purpose while also enabling transparency.

 

Impact of the FASB

As mentioned earlier, investors are one of the most impacted by the efforts of the FASB. GAAP allows stakeholders and investors to interpret a company’s financial position and condition through the financial statements, which allow comparisons with other companies and help make informed investment decisions.

Other users of the GAAP accounting standards include, but are not restricted to, creditors, competitors, employees, and regulatory bodies that are evaluating companies.

 

What Role Does the FASB Play in the U.S.?

The FASB plays a pivotal part in the functioning of several regulatory bodies in the U.S., as accounting standards are important for an efficient market. The Securities and Exchange Commission (SEC) accepts GAAP as the accounting standard when evaluating financial records of companies, non-profits, or the government, and considering it as authoritative (Financial Reporting Release, No. 1 Section 101).

The purpose of standard accounting principles is to improve reporting for better understanding by the public and others involved in the process of regulating financial information within the U.S.

 

FASB vs. IASB

While the FASB mainly focuses on setting standards and rules for accounting professionals in the U.S., the International Accounting Standards Board (IASB) deals with setting standards and rules for international accounting. Due to the global nature of businesses today, the FASB and IASB often cross paths due to overlap in businesses, helping foster cooperation on the issue of improving global accounting standards.

International Financial Reporting Standards (IFRS), the accounting standards established by the IASB, are followed by almost 110 countries. The FASB is an active contributor to the development and creation of the IFRS, along with maintaining GAAP, its own accounting standards.

FASB engages with IASB through forums, such as the IASB’s Account Standards Advisory Forum (ASAF), as international perspectives enable FASB to establish and create better GAAP.

 

Additional Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Accounting Standard
  • GAAP Hierarchy
  • IFRS vs. US GAAP
  • Full Disclosure Principle

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