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The Financial Accounting Standards Board (FASB) is a private organization that was established in the 1970s to increase transparency of available financial data for use by investors, and the primary function of the FASB has remained essentially the same over the years.
The volatility in the financial markets that caused the stock market crash of 1929 and the subsequent Great Depression emphasized the need for financial reporting requirements for public companies. After those requirements were established, FASB was set up to create accounting and reporting standards so that public companies could efficiently report the same types of financial data in comparable ways. The nation’s Generally Accepted Accounting Principles are a result of the work done by FASB.
Here are some significant initiatives that were put forth by FASB and some of their plans for the future.
How FASB Sets Reporting Standards
The FASB is the sole organization that is recognized by the Securities and Exchange Commission (SEC) to set accounting and financial reporting standards for public companies in the United States (U.S.). The group develops standards that considers the needs of a wide variety of stakeholders such as investors, regulatory agencies and auditors. The accounting standards that are developed and updated by FASB are designed to uncover the true nature of corporate financial data and scale to support changes in the business environment.
Maintenance of an Independent, Third-Party Review Process
A function of the FASB is to provide a structured approach for the generation and updating of accounting standards that are free from bias by special interest groups. Subsequently, the seven-member FASB is composed of accounting experts who work exclusively for FASB during their terms of service. With the exception of the Board’s chair, members serve five-year terms that can be renewed once for a second five years. The Board’s chair and members are expected to dissociate themselves from their former employers to avoid conflicts of interests.
Incorporation of a Cost-Benefit Analysis for New or Updated Standards
FASB members propose new accounting standards and updates to existing ones based upon their own industry knowledge and input from a variety of sources. Accounting experts, who support academia and all types of industries, are encouraged to participate in the standards-setting process. However, FASB members consider the total cost of implementing a standard before it is approved and published for use. The Board will not approve standards whose total costs significantly exceed the expected benefits of their use.
Collaboration with International Accounting Standards Board
The International Accounting Standards Board (IASB) and FASB were established during the same time frame, but IASB has garnered more attention recently because of increases in international business activities. The proliferation of technological tools as well as trade agreements have made it easier for many businesses to operate in overseas markets. FASB remains true to its mission of creating quality reporting standards for American businesses, but it is collaborating with the IASB to give input to the international community and to make sure that U.S. GAAP standards align as much as possible to international standards.
Conclusion
Financial leaders in early American companies like General Motors believed that they were only obligated to disclose their corporate financial data to their existing investors as a means of demonstrating good stewardship. However, these companies ultimately benefited from later regulations that required that they make their financial data public through the SEC. The function of the FASB is to continuously streamline financial reporting standards which ultimately results in more efficient markets.
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