financial accounting standards board

financial accounting standards board

The Evolution and Impact of Financial Accounting Standards Board (FASB)

1. Introduction to FASB and its Role in Financial Reporting

Since the establishment of the Financial Accounting Standards Board (FASB), a private sector standard-setting body, some observers have stated that the Board represents a “significant shift in the locus of power in such matters from the profession to society”. At the time of the creation of the FASB, the American Institute of Certified Public Accountants (AICPA) had been the body most active in promulgating authoritative professional literature. It is felt by some that the public interest is better served if the responsibility for developing general rules for an industry is assumed by a party whose objective will be to operate in the public interest.

There is little doubt that the present financial accounting environment for public companies and other business entities is a function of a decade of effort to correct perceived deficiencies in the accounting for business entities. That the environment in which the FASB operated to provide a solution to these and other issues was influenced by a combination of pressures that reflect the varied interest groups involved. As such, the resulting standards written by the FASB had to create many changes in established positions and traditions. It is inevitable, therefore, that the standards will lead to future problems and difficulties. Some characteristics of the process warrant further thought and consideration to avoid future problems.

2. Historical Development of FASB and Key Milestones

The Recognition and Measurement Project was released in 1973, after a four-year development process and nearly a decade of controversy with controversial subjects following. FASB incorporated mixed attributes, including verification standards, but excluded some accounting issues. FASB then recognized the urgent need for ARB 43 (that statement was the professional guidance of the Corporation) and after one year published preliminary drafts and received 300 responses. FASB has completed its project. With its Determination and Writing Board, not FASB managed the detailed communication process and the proposed contents, conclusions, and developments with time for the industry before its publications. At the time, the FASB effort to include 500 scholars made it stronger; its weaknesses included its monopoly and conflict with the AICPA and the SEC. FASB has attempted to ensure the balance of the Board’s composition, commits to the diversity of the procedure, and seeks advice from its organization to the point of securing the 45 experienced accountant commissioned at its staff in 1983.

Development and changes in the U.S. accounting profession are deeply embedded within the American framework of business organization and governance – including established legal, political, and educational systems determining the regulation, control, and application of these measures. A more recent phenomenon affecting this process has been the growing influence of private sector individuals and organizations passing ‘due process’ accounting standards to be recognized and adopted by the U.S. government. This article examines the historical developments and key milestones shaping the evolution of a main U.S. standard setting entity – The Financial Accounting Standards Board – including a summary of controversial and significant outcomes from several specific issues over its more than 30-year existence.

3. The Structure and Functioning of FASB

Strategic decision-making of the board is guided by an organizational theory and institutional theory which is influenced by stakeholders. According to Rutherford, the functioning of standard setters is influenced by their output legitimacy, stakeholder strategies, and symbolic control. This means that standard setters function the way they do in order to maintain their legitimacy. Their legitimacy is, to an extent, determined by the fact that the organizations involved in setting the standard are perceived to be acting in the best interests of the public and serving a legitimate and appropriate role.

The FASB is currently composed of five full-time members with a range of 4-8 staff that fluctuates dependent on the volume of work and funding levels. If one of the private members is deprived of their job, there are two ways in which they are replaced. If at the time they leave the committee, in the last 5 years, they have been in the office for at least five years, their seat must be filled by another person of the same profession. The replacement is also not allowed to be involved more than five years after becoming a member. If there is more than five years before the member leaves the FASB, their seat may be filled by any qualified individual. They could even be someone who has previously acted as a committee employee.

4. The Impact of FASB Standards on Financial Reporting and Decision Making

The Impact of Reporting Standards: Because of lack of agreement, measuring the impact of financial reporting standards is, in some respects, speculative. For the reasons outlined above, not everyone agrees that the standards are useful. But there is some evidence that those who make actual use of the standards find them useful. Disclosure is reduced in the wake of an accounting change as the marketplace adjusts secondary sources of information to supplement the decreased level of disclosed information. Similarly, there must be a demand for accounting information, so also, there is a demand for more intelligible information. Third-party sources fill the gap of reduced required disclosures and expensive independent audits. Third-party sources of information are used by investors, creditors, other capital market participants, management of reporting entities, and prospective investors, creditors, and employees to research financial information. This research is done after the production and release of the financial statements, after the independent auditor has completed its work, and yet while litigation back and forth is going on, which is costly to all involved. Since users don’t all agree, the real issue is whether the standards further the public interest. FASB has made clear that it is for the purpose of serving the public interest by setting the best accounting standards. It is up to the public to make the ultimate judgment.

Bias and Motivation: The preceding sections have discussed the role of FASB and the processes it follows. The point of all of this is to produce financial reporting standards that improve financial reporting so as to make it even more useful for investors, creditors, employees, and others. But has FASB been successful in reaching its goals? Has financial reporting improved even further? And has decision making improved as a result? That is, have investors, creditors, and others found financial reporting more useful since FASB was formed?

5. Challenges and Future Directions for FASB

Certainly, the different audiences for current period financial accounting measures and asset valuation measures could support this outcome. If so, what does a borrower and a creditor each gain by affixing the ‘intangible asset’ label to resources that generate economic gains for the entity? The challenge for financial accounting standard-setters is to ensure that as the type of information and the scope of information changes over time to meet the demands of capital markets, the quantity of such information does not diminish. There is a widespread, long-term trend for publicly held business entities to decentralize operations, but a significant portion of financial market information remains quite centralized in issuer consolidated financial statements, which are based on ‘control’ concepts. This disconnect provides fertile ground to argue that financial accounting and reporting can no longer add significant or necessary value to achieving the FASB’s mission.

The core mission of FASB, to establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provide decision-useful information to investors and other users of financial reports, is likely to become more challenging, not less, in the future. Here we consider implications of financial reporting developments that are expected to make the future standard-setting agenda more challenging, and we suggest changes that could enhance the relevance and impact of standards. Today, a minor share of the total market capitalization of equity is identified as intangible assets in financial statements. Some analysts predict that share will grow to a super-majority proportion over the next 20 years. Will financial accounting as profit and loss reporting focus more on current period events, and balance sheets focus more on assets that embody the value of the entity but are not recognized as assets of the entity?