FASB is an independent, not-for-profit organization established with a mandate to develop and establish financial accounting and reporting standards for use in the United States.
The financial statements must be honest, consistent and verifiable to both investors and creditors and other interested parties who rely on reliable information to make decisions. The FASB works under the purview and oversight of the SEC, which is a nice way of saying the government regulatory agency overseeing U.S. financial markets.
FASB was established in the year 1973 after the Accounting Principles Board (APB) was completely de-linked since 1959. The reason for such de-linking rather than coming up with FASB whose establishment came with high stakes on independent, versatile and all-inclusive accounting standards was that APB had turned out to be inconsistent with unclear financial reporting; thus, its de-linking was long overdue.
The FASB has seven members who are accountants, business professionals and academics with experience. The terms of the board members of the FASB run for five years full-time and have a possibility of renewal. To facilitate the FASB in its operations, it has a huge staff with this incorporation of the Financial Accounting Standards Advisory Council that helps in letting input on some of the important financial reporting issues.
The FASB has provided the Generally Accepted Accounting Principles (GAAP) that all business organization is expected to follow when operating in the United States of America. GAAP provides accounting principles for presentation of a company’s balance sheet, income statement, cash flow statement, and statement of shareholders’ equity.
The board employs the following methods to establish the standards: An open process consisting of research public consultations, and deliberation. The board consults huge numbers of stakeholders, which include investors, regulators, auditors, and industry experts every time they devise a new standard or alter an existing one.
1. Accounting Standards Update: The FASB issues accounting standards that have a broad objective of revising or issuing new guidance concerning the GAAP. With this regard, issues as they appear presented can be considered as being much more significant avenue in developing issues on the go with fine-tuning the then existing standards and thus ensuring that financial reporting has relevance to a dynamic environment within the economic and business context.
2. Conceptual Framework Evolution FASB develops a conceptual framework also, which may serve to guide the future development of accounting standards. A product yields a basis for developing objectives of financial reporting and offers principles guiding general normative input when testing standards issues that arise during the course of the standard-setting process. That includes recognition, measurement, and presentation of financial transactions.
3. Interactions with Other Standard-Setting Bodies: This is an interaction the FASB carries out with the international bodies setting standards such as International Accounting Standards Board in an attempt to harmonize the differences between U.S. GAAP and IFRS. It makes it simpler for account standards to be harmonized world over. It makes easier for investors and companies to compare the financial statement across borders.
4. Specific Accounting Standards: FASB offers accounting standards in the areas of specific accounting including Leases, Revenue recognition, Financial instruments, and pensions. The standards offered include summaries on how such transactions ought to be treated in the books of accounts of companies.
Challenges and Criticisms:
Although playing such an important role, the FASB has, from time to time, been criticized for the complexity of GAAP and, generally what has been perceived as a delay in reacting to new accounting issues. Some say that some FASB standards are just too complex or difficult to implement, which is a hardship on smaller companies. In fact, the effort at the international level to converge U.S. GAAP with IFRS had taken much more time than what was actually contemplated, mainly because of issues in accounting philosophies.