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July 19, 2022

What is the Financial Accounting Standards Board (FASB)

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The Financial Accounting Standards Board is an independent non-profit organization launched to create and optimize financial accounting standards in the private business sector. Keep reading the article to learn more about FASB and how it works. You will also learn about the five main functions of FASB.

What is FASB?

The Financial Accounting Standards Board, or FASB, aims to create accounting standards used within the Generally Accepted Accounting Principles (GAAP) guidelines. The history of FASB traces down to its successor — the Accounting Principles Board, which has been used since 1973.

FASB standards govern the accounting methods used by private businesses and organizations, and it offers guidelines for presenting information in their financial statements. These standards were created to ensure all businesses in all industries record and present data according to generally accepted rules.

The Financial Accounting Standards Board has to coordinate its rules and actions with the International Accounting Standards Board (IASB) to ensure the establishment of universal accounting rules. The IASB is also responsible for the International Financial Reporting Standards (IFRS).

How does the Financial Accounting Standards Board Work?

As mentioned, FASB aims to govern private businesses and non-profit organizations. The board uses its authority to establish GAAP in the U.S for these organizations.

Moreover, the Securities and Exchange Commission, or SEC, recognizes FASB as the setter of accounting rules for public companies. The state accounting boards, the American Institute of Certified Public Accountants (AICPA), and other organizations recognize FASB’s authority to govern public companies.

FASB is a part of a bigger independent non-profit organization (Financial Accounting Foundation). Apart from FASB, the organization includes:

  • The Governmental Accounting Standards Board (GASB).
  • The Financial Accounting Standards Advisory Council (FASAC).
  • The Financial Accounting Foundation (FAF).
  • The Governmental Accounting Standards Advisory Council (GASAC).

The aim of this collective organization is to optimize financial accounting methods and reporting standards to make the public information useful to investors and other financial reports’ readers.

As for how the FASB organization works, it has seven full-time board members. The FAF’s board of trustees appoints each FASB member for five-year terms. The former board member can be chosen for another term. However, one person can’t be a board member for longer than ten years.

Back in 2009, FAF launched a FASB Accounting Standards Codification — an online website providing relevant tools and information. The website has a basic free version and a paid subscription with more advanced features.

What is the Financial Accounting Standards Board (FASB)

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Financial Accounting Standards Board Functions

FASB has several purposes, starting from creating generally accepted rules by specific organizations to educating investors and the general public. Typically, five features of FASB are recognized:

  • Creating and enforcing reporting standards.
  • Optimizing accounting standards.
  • Establishing new accounting principles.
  • Ensuring information transparency and usefulness for investors and the general public.
  • Educating the general public on accounting standards.

Each function plays a critical role in improving accounting and financial reporting standards for businesses and non-profit organizations.

Creating and Enforcing Reporting Standards

Creating and enforcing a general and consistent set of rules and standards makes the economy and market more efficient. Accountants in various companies follow these rules and generate detailed reports on the business’s financial state. These reports are then handed to stakeholders.

Optimizing Accounting Standards

FASB aims to improve accounting standards wherever possible. The mission of this non-profit organization is to update accounting principles as the world changes. The mission includes implementing modern technology into accounting.

Establishing New Accounting Principles

Establishing and setting new principles that improve the accounting system is another critical task of the board. One of the latest principles is the disclosure principle. According to the disclosure principle, companies can publicize the details and structure of costs incurred during the fiscal year.

Ensuring Information Transparency and Usefulness

In order to provide fair conditions within the capital market, companies have to disclose information related to a company’s profits and losses. Even though the most recent changes by the FASB allow businesses to restrict some information, it doesn’t impact an investor’s ability to analyze the financial state of a chosen company.

The new changes only impact specific businesses, such as companies related to biotech and pharmaceutics. These companies often conduct trials of their new products, and this data is irrelevant to investors. Thus, companies are allowed to hide such data.

Educating the General Public on Accounting Standards

Accountants must spend years studying accounting principles. Moreover, they also need more practice to understand how all these principles work. However, FASB’s mission is to facilitate the educational process not just for professional accountants but also for other professionals in the financial industry. FASB also aims to provide transparency.

The Importance of FASB in the U.S.

FASB is critical to investors since they make decisions based on reports generated by accountants of specific companies. FASB principles and rules are also crucial to creating and using general guidelines used by accountants. FASB is also important to creditors and regulatory organizations that are evaluating companies.

FASB vs. IASB

IASB and FASB are part of one organization. However, each of these entities has a different purpose. FASB focuses on creating and updating standards for accounting professionals in the U.S. IASB focuses on creating and updating standards within international accounting.

IASB and FASB often overlap. Thanks to FASB, IASB has managed to create and enforce International Financial Reporting Standards (IFRS), followed by almost 110 countries.

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Author: Charles Lutwidge

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