The Financial Accounting Standards Board
The Financial Accounting Standards Board (FASB) is a private, not-for-profit organization whose primary purpose is to develop Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest.
The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. It was created in 1973, replacing the Committee on Accounting Procedure (CAP) and the Accounting Principles Board (APB) of the American Institute of Certified Public Accountants (AICPA).
The FASB is not a governmental body. The SEC has legal authority to establish financial accounting and reporting standards for publicly held companies under the Securities Exchange Act of 1934.
Throughout its history, however, Commission policy has been to rely on the private sector for this function to the extent that the private sector demonstrates ability to fulfill the responsibility in the public interest.
The FASB is subject to oversight by the Financial Accounting Foundation (FAF), which selects the members of the FASB and the Governmental Accounting Standards Board and funds both organizations. The Board of Trustees of the FAF, in turn, is selected in part by a group of organizations including:
- American Accounting Association
- American Institute of Certified Public Accountants
- CFA Institute
- Financial Executives International
- Government Finance Officers Association
- Institute of Management Accountants
- National Association of State Auditors, Comptrollers and Treasurers
- Securities Industry Financial Markets Association
The FASB's structure is very different from its predecessors in many ways. The board consists of seven full-time members.
These members are required to sever all ties to previous firms and institutions that they may have served prior to joining the FASB. This is to ensure the impartiality and independence of the FASB.
All members are selected by the FAF. They are appointed for a five year term and are eligible for one additional five year term.
The current members are (with current term end dates indicated):
- Leslie F. Seidman, Acting Chairman (2011)
- Thomas J. Linsmeier (2011)
- Marc A. Siegel (2013)
- Lawrence W. Smith (2012)
In additional to the full-time members, there are approximately 68 staff members. These staff are, "professionals drawn from public accounting, industry, academe, and government, plus support personnel."
FASB to expand to seven members and have acting Chairman
- Source: Statement From Chairman Schapiro on Financial Accounting Foundation Developments SEC press release, August 24, 2010
The following is a statement from SEC Chairman Mary L. Schapiro regarding today's announcement by the Board of Trustees of the Financial Accounting Foundation (FAF) that the Financial Accounting Standards Board (FASB) will expand to seven members. In addition, FASB Chairman Robert Herz has decided to retire from the FASB, and current FASB member Leslie Seidman has been appointed Acting Chairman effective October 1.
"I commend the Financial Accounting Foundation for its ongoing efforts to evaluate and improve the effectiveness and efficiency of the structure and operation of the Financial Accounting Standards Board by increasing the size of the Board. The Foundation has determined that this revised structure will facilitate the continuing efforts of the FASB to work with the International Accounting Standards Board on their important convergence work plan. In addition, this should enhance the ability of the FASB to address issues facing the U.S. capital markets and the needs of investors.
"I also would like to commend FASB Chairman Robert Herz for his more than eight years of service. During his tenure, Chairman Herz has served as an effective investor advocate to improve the quality of financial reporting standards around the world. I welcome the appointment of Leslie Seidman as Acting Chairman. During this interim period, I look forward to working with Acting Chairman Leslie Seidman and the FASB as they continue their important work."
- Beancounter there, done that The Economist, September 30, 2010
- Five for FASB: Golden Appointed to Board CFO.com, September 17, 2010
- Cloudy Future for GAAP CFO.com, August 31, 2010
The FASB's mission is "to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information."Facts About FASB.
To achieve this, FASB has five goals:
- Improve the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability, and on the qualities of comparability and consistency.
- Keep standards current to reflect changes in methods of doing business and in the economy.
- Consider promptly any significant areas of deficiency in financial reporting that might be improved through standard setting.
- Promote international convergence of accounting standards concurrent with improving the quality of financial reporting.
- Improve common understanding of the nature and purposes of information in financial reports.
FASB’s accounting standards codification
- Source: Impact of FASB’s Accounting Standards Codification on Filings by U.S. Public Companies Mayer Brown, September 8, 2009
On June 30, 2009, the Financial Accounting Standards Board (the "FASB") adopted Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162 (the "FASB Codification"). In short, the purpose of the FASB Codification was to reorganize all existing U.S. accounting and reporting standards issued by the FASB and other related private-sector standard setters into one authoritative body of literature, which will ease research of accounting literature and reduce the risk of noncompliance.1 Going forward, all revisions will be made in real time to the FASB Codification. The FASB Codification is effective for all financial statements issued for interim and annual periods ending after September 15, 2009.
As a result of the adoption of the FASB Codification, all references2 in public company financial statements and related footnotes will be to the classification system set forth in the FASB Codification, rather than to the applicable previously existing literature.3 Conforming changes will also need to be made throughout a company's disclosure documents, with changes most likely arising in the Management's Discussion and Analysis of Financial Condition and Results of Operations4 and, most particularly, in the discussion of critical accounting policies usually contained in that discussion. Accordingly, the entire next Quarterly Report on Form 10-Q (the third quarter report for calendar year-end companies) and the entire next Annual Report on Form 10-K will need to be carefully reviewed to ensure that all appropriate changes are made.
Finally, on August 18, 2009, the Securities and Exchange Commission published interpretive guidance titled "Commission Guidance Regarding the Financial Accounting Standards Board's Accounting Standards Codification."5 In its guidance, the SEC states that concurrent with the Effective Date, references in the SEC's rules and SEC staff guidance to specific standards under U.S. generally accepted accounting principles should be understood to mean the corresponding reference in the FASB Codification. The SEC also states that the FASB Codification does not supersede any SEC rules or regulations and is not the authoritative source for SEC rules or SEC staff guidance, and also that the inclusion of any SEC rules or SEC staff guidance in the FASB Codification will not affect how such items may be updated in the future by the SEC.
1. Additional benefits of the FASB Codification are that it will assist with international convergence of accounting standards and it will serve as the authoritative reference source for the new XBRL requirements.
2. There is a limited exception for companies that continue to follow grandfathered guidance not included in the FASB Codification. These companies will continue to reference the grandfathered provisions as appropriate, rather than the FASB Codification. A listing of the grandfathered provisions, as of July 1, 2009, can be found in the FASB's Notice to Constituents located at here.
3. The accounting literature replaced by the FASB Codification includes the FASB Financial Accounting Standards (FASs), FASB Interpretations (FINs), FASB Technical Bulletins (FTBs), FASB Staff Positions (FSPs), FASB Staff Implementation Guidelines (Q&As), Emerging Issues Task Force Abstracts, Emerging Issues Task Force Topic D, Derivative Implementation Group Issues (DIG), Accounting Principles Board Opinions (APBs), Accounting Research Bulletins (ARBs), Accounting Interpretations (AINs), the American Institute of Certified Public Accountants (the "AICPA") Accounting Statements of Position (SOPs), AICPA Audit and Accounting Guides (AAGs) – incremental accounting guidance, AICPA Practice Bulletins (PBs) and AICPA Technical Inquiry Service (TIS) – for software revenue recognition.
4. Item 303 of Regulation S-K.
5. Release No. 33-9062A; 34-60519A; FR-80A.
Final report of Financial Crisis Advisory Group
Source: Final Report of Financial Crisis Advisory Group report July 28, 2009
In our discussions, we recognized the critical role that general purpose financial reporting (“financial reporting”) plays in the financial system and we identified four principles that financial reporting must meet if it is to fulfill this role well. We believe that the financial crisis has underscored the importance of these principles. The principles are as follows:
- 1. Effective Financial Reporting
Financial reporting plays an integral role in the financial system by striving to provide unbiased, transparent and relevant information about the economic performance and condition of businesses. Effective financial reporting depends on high quality accounting standards as well as the consistent and faithful application and rigorous independent audit and enforcement of those standards.
Financial reporting is of great importance to investors and other financial market participants in their resource allocation decisions and to regulators and other users. The confidence of all these users in the transparency and integrity of financial reporting is critically important to global financial stability and sound economic growth.
Where regulatory standards differ from accounting standards in ways that could have significant effects on financial reporting, the effects of those differences should be disclosed in a manner that does not compromise the transparency and integrity of financial reporting.
- 2. Limitations of Financial Reporting
Although effective financial reporting provides indispensable rigor and transparency to the market, investors, analysts, regulators and others cannot rely exclusively on the information it provides. All users should recognize the limitations of financial reporting: it provides only a snapshot in time of economic performance and cannot provide perfect insight into the effects of macro-economic developments.
Financial reporting is also dependent on the generation of reliable data by well-functioning markets that have proper infrastructure, and the use by financial institutions and other business entities of proper processes for price verification and other aspects of the valuation of assets and liabilities.
- 3. Convergence of Accounting Standards
Because of the global nature of the financial markets, it is critically important to achieve a single set of high quality, globally converged financial reporting standards that provide consistent, unbiased, transparent and relevant information, regardless of the geographical location of the reporting entity.
- 4. Standard Setter Independence and Accountability
To develop standards that are high quality and unbiased, accounting standard setters must enjoy a high degree of independence from undue commercial and political pressures, but they must also have a high degree of accountability through appropriate due process, including wide engagement with stakeholders, and oversight conducted in the public interest.
We reviewed the governance, practices, and standards of the Boards that are most relevant to the financial crisis in light of these principles and have formulated our recommendations accordingly. We strongly believe that to develop high quality, unbiased accounting standards that are widely accepted, the Boards must follow their due process procedures, including wide consultation with interested parties, and our recommendations on possible new standards are not intended to preempt the outcome of that due process. Because we anticipate that our report will be of interest to the Boards’ constituents, as well as to policymakers, we have included certain recommendations that relate to matters not wholly within the purview of the Boards.
Recent rulemaking benefits bank balance sheets
Source: Bank Balances Shift With Rule Changes After One Tweak Improved the Books, Another Could Erase Gains and More Washington Post, August 5, 2009
"A controversial change in accounting rules earlier this year has allowed banks to claim billions of dollars in additional earnings simply by tweaking their bookkeeping, greatly enhancing the appearance that the industry is returning to health.
A study by an accounting expert found that 45 financial firms reported higher first-quarter earnings because of the change. The total benefit exceeded $3 billion. Some large firms, including Prudential Financial and Bank of New York Mellon, were able to report profits rather than losses.
But accounting rulemakers are considering further changes that could drain the blood right back out of the industry, potentially forcing banks to acknowledge paper losses even larger than the new windfall of paper gains."
Volcker criticizes efforts to reduce FASB indepedence
- Source: Volcker Criticizes Accounting Proposal New York Times, November 16, 2009
"A proposal to give banking regulators authority to block accounting standards is “a terrible idea,” Paul A. Volcker, a former chairman of the Federal Reserve Board, said Monday.
Mr. Volcker has been an outspoken critic of “mark to market” accounting that forced banks to take large write-downs in asset values, a position cited by banks earlier this year when they persuaded members of the House Financial Services Committee to demand changes in that rule.
But in an interview Monday, two days before a House committee vote on a proposal that would grant bank regulators the power to sidestep accounting standards, Mr. Volcker said he believed that accounting rules had to be set by an independent agency. He voiced concern that rising political pressures on both sides of the Atlantic were endangering that independence.
The Financial Services Committee is to vote on amendments to a bill to establish a council of bank regulators as a systemic risk regulator, able to take action if bank activities threaten financial stability.
The amendment, proposed by Representative Ed Perlmutter, Democrat of Colorado, and strongly supported by the banks, would give that group of regulators the power to order the Securities and Exchange Commission, which now oversees the Financial Accounting Standards Board, to suspend or change any accounting rule that the council thinks is a threat to financial stability.
The amendment has been endorsed by the American Bankers Association, which says the S.E.C.’s focus, on helping investors, is too narrow. The amendment has been strongly opposed by groups including the Chamber of Commerce and groups representing investors.
Leslie Oliver, an aide to Representative Perlmutter, said the congressman was still working on final language of the amendment and expected it to be voted on by the committee on Wednesday.
The bankers’ group contends it is clear that accounting standards worsened the crisis, while others argue that the accounting rules belatedly forced the banks, and their regulators, to report on the disastrous results caused by their previous errors.
Mr. Volcker was the founding chairman of the International Accounting Standards Committee Foundation, which oversees the International Accounting Standards Board, and has long been a supporter of independent rule-setting. He has been campaigning for a single set of international accounting standards, but he said on Monday that he feared that effort was being undermined.
“You have the politicians in Europe influencing it,” he said. “You have the politicians in the U.S. influencing it.” If that continues, he said. “We’re never going to get common standards.”
Asked about the Perlmutter amendment, he responded, “That’s a terrible idea.”
The I.A.S.B. sets standards that are being adopted in many countries around the world. But it has run into trouble in Europe as some politicians say it has not shown enough deference to the European Commission, which has asserted the right to modify rules issued by the board.
The S.E.C. has been weighing whether to allow companies to use international accounting standards in this country, something the accounting industry has advocated.
Boards in the United States and abroad have also been working to bring their standards in sync, but both have faced substantial opposition from banks opposed to being forced to show the market value of securities they own.
The separation of accounting and capital standards
- Source: Remarks of Robert H. Herz, Chairman, Financial Accounting Standards Board, AICPA National Conference on Current SEC and PCAOB Developments, December 8, 2009
- Independent accounting standards that are aimed at providing relevant, transparent, and unbiased financial information are of prime importance to our reporting system, our capital markets, and our economy.
- Much of the discussion about the role of accounting standards in the economic crisis seems to confuse our role of helping to provide investors and the capital markets with relevant and transparent information on the performance and financial condition of financial institutions (along with other companies) with the regulatory need to ensure the safety and soundness of financial institutions and stability of the financial system. While these tasks often overlap, they are not the same and the setting of accounting standards (i.e., GAAP) and the setting of regulatory capital and reserves should be decoupled so that one does not drive the other.
- Constituents have strongly divided views on issues relating to the accounting for financial instruments and reporting by financial institutions, particularly as regards the use of amortized cost vs. fair value measurements. I will discuss some of the key issues in these debates, including concerns about “procyclicality.” I will also offer some thoughts on why reporting both fair value information and amortized cost information might help bridge this divide by providing investors and regulators with better, more timely insights on the performance, financial condition, and underlying risks at financial institutions, without eliminating traditional measures of net income and earnings per share and while also allowing regulators to independently establish regulatory capital requirements.
- How we are systematically and thoroughly addressing these important issues in our project to improve the accounting for financial instruments.
FASB and IASB standards convergence
- Source: Major Accounting Changes: When Will They Hit? CFO.com, July 13, 2010
When U.S. and international accounting standard-setters reprioritized their pending joint projects last month, they appeared to be backtracking on their self-imposed deadline to finish their convergence project by June 2011, a pledge they had recommitted themselves to as recently as last fall. But Financial Accounting Standards Board member Thomas Linsmeier chafes at the word "deadline." During a FASB webcast two weeks ago, he used more flexible terminology: "target completion dates."
However you want to label the new schedule, the fact is that rulemakers will still be releasing a slew of major accounting changes in the near future, creating real, looming deadlines for the finance executives who will have to absorb the new rules into their financial-reporting systems. Below is a timeline of the dates that are known, such as deadlines for commenting on some of the proposals. Other dates — such as when all these rules have to be implemented — are still up in the air. The standard-setters plan to ask for feedback on that issue by the end of September.
The changes to some of the dates were prompted by complaints that FASB and the International Accounting Standards Board were overly ambitious in their convergence work, which has been under way for nearly a decade. The boards have saved the hardest projects for last, which critics argue leaves the boards' constituents little time to offer thoughtful analysis. The rulemakers have responded with a promise that they will issue no more than four "significant or complex" drafts for review during any one quarter.
Still, their "most urgent" projects are scheduled to get done by June 2011 and will put a burden on both them and those that have to implement their work. "Finalizing these standards will require significant effort and focused intensity by both us and our stakeholders," FASB and IASB noted in their most recent progress report.
Those who want to influence the final outcome of the new rules can begin doing so this summer, as the rulemakers will have released four major projects for review by August. Proposed changes for accounting for financial instruments, revenue, and fair-value measurements have recently been issued, and a proposal for leases is forthcoming.
- FASB and IASB Rejigger Convergence Plans Web CPA, October 29, 2010
- FASB official website
- FASB Exposure Drafts
- FASB and IASB: Dependence Despite Independence
- Financial Accounting Foundation Opens New Site
- Accounting Standards Group Again Delays Controversial Rules Law.com
- New Faces Enter Fray in Accounting New York Times, October 21, 2010
- Leases and credit ratings Financial Accounting Standards Research Initiative, October 6, 2010
- After Eight Years at FASB, Herz Looks Back CFO.com, October 4, 2010
- FAS 157 is Now Topic ASC 820 Finance Tangent, December 17, 2009
- Financial Accounting Foundation Appoints New Members to the Financial Accounting Standards Advisory Council FASB, December 10, 2009