Financial Accounting Standards Board

THE FINANCIAL Accounting Standards Board, which is often simply referred to as the FASB, is responsible for developing improved standards related to financial accounting and reporting. FASB is believed to be an important part of the accounting process because of the very nature of the economy and the stock market; this belief stems from the fact that many investors rely upon the financial statements issued from a company when determining which stocks to purchase, and an opinion from the FASB carries the weight of law.

Since 1973, the FASB has maintained the absolute authority to regulate standards for the accounting industry. While the Securities and Exchange Commission (SEC) has been granted statutory authority to make decisions concerning accounting standards, both the SEC and the American Institute of Certified Public Accountants (AICPA) have recognized FASB statements as authoritative in regards to accounting practices and policies.

While some consider the FASB to be a committee for establishing policies and procedures, the FASB is in actuality an independent structure consisting of a multi-divisional hierarchy. The first division is the Financial Accounting Standards Board, which is the most recognized division and provides opinions on accounting standards. The Financial Accounting Standards Advisory Council (FASAC) is a lesser known division comprised of 30 members who consult with the FASB on technical issues, and the Financial Accounting Foundation (FAF) is the final division and is responsible for selecting the FASB members and ensuring that there are funds for the board to operate.

When the FASB is considering either a change or an addition to accounting standards the proceedings are open to the public and constituent views are openly accepted. In reaching a decision as to whether to consider an issue the FASB may consult with numerous other standard setting bodies such as the Accounting Standards Executive Committee (AcSEC) or the Auditing Standards Board of the AICPA. Once the FASB has completed consultation with these entities, several additional factors are then considered.

The pervasiveness of the issue is one of the first considerations and involves the FASB determining the extent to which the issue is currently impacting users. For example, the FASB may examine whether there are stark differences in how an issue is being handled and determine that the issue is of such importance that all users should be applying the accounting principle in a similar manner.

Additionally, the FASB will consider the impact a change may have on international accounting principles, and will occasionally consider whether there is support for a principle from one of the other national standard organizations. In reaching an agreement on proposed changes in standards, the FASB follows established principles. These principles are: to be objective in its decision-making, to weigh carefully the views of its constituents, to promulgate standards only when the expected benefits exceed the perceived costs, to bring about changes in ways that minimize disruption to the continuity of reporting practice and to review the effects of past decisions and interpret, amend or replace standards in a timely fashion.