Financial Accounting Standards Board (FASB) Definition
The Financial Accounting Standards Board is a private, non-profit organization whose purpose is to develop and improve the way financial accounting standards are issued for publicly traded companies. It does so by working with various partners in order to determine what should be considered for their statements, education stakeholders, and issue Statements of Financial Accounting Standards (SFASs).
Accounting standards are the guidelines companies use to report information, such as financial conditions and results of operations, in their annual reports.
The FASB follows a set of standards known as Generally Accepted Accounting Principles (GAAP). GAAP refers to the rules and regulations that are the foundation for how companies report financial information.
History of the Organization
The Financial Accounting Standards Board (FASB) was created by the Securities Exchange Act of 1934 under instruction from Congress to establish accounting principles that would provide transparency to investors regarding business transactions.
The FASB was initially created through a joint effort between 3 private organizations: American Institute of Certified Public Accountants (AICPA), American Accounting Association (AAA), and National Association of Accountants (NA).
In 1973, these 3 organizations merged into one 128-member board through an act known as the Financial Foundation Act. In 2001, the Financial Accounting Foundation (FAF) separated from the Financial Accounting Standards Board, which now has a sole focus on creating accounting principles that provide transparency to investors.
“The collective mission of the FASB, the GASB, and the FAF is to establish and improve financial accounting and reporting standards to provide useful information to investors and other users of financial reports and educate stakeholders on how to most effectively understand and implement those standards.”
Functions of FASB
1.) Establish and interpret GAAP
FASB has the power to create accounting principles that will become the standard for all financial reporting. They define best practices and interpretation of these GAAP principles, giving businesses the information they need to make good business decisions.
2.) Develop and improve the implementation of GAAP
This is in order to provide financial reporting objectives that promote a transparent discussion of the reporting entity’s financial position, results from its operations, and cash flows.
3.) Issue Statements with Accounting Standards
The FASB issues accounting statements, which are used by companies as guidelines when preparing their own financial reports. These statements are called Statements of Financial Accounting Standards (SFASs).
4.) Overseeing changes to existing set standards, and making sure proposed changes meet legal requirements.
FASB is in charge of devising or changing standards that are meant to improve the reliability of financial data by eliminating factors that distort reported information.
5.) Oversight over SEC’s staff decisions, draft reporting requirements, and compliance with FASB reporting.
FASB works toward maintaining its standards after they are implemented by companies through the Securities Exchange Act of 1934.
6.) Ensure investors receive information
Investors have the right to know the profits and losses of a company in its operations. It is the responsibility then of FASB to make sure that investors have access to essential information. It ensures the proper treatment of accounting principles and financial information so that companies can provide accurate reports to their investors.
Role of FASB
The Financial Accounting Standards Board (FASB) is responsible for setting the U.S. Generally Accepted Accounting Principles (GAAP), and interpreting and enforcing them across reporting entities in publicly traded companies in the United States of America. These principles guide accountants in their practical application of generally accepted methods of presenting and reporting information – such as annual reports filed by corporations, or 10-K reports issued by businesses – used widely by investors when deciding whether to buy or sell shares.
FASB vs IASB
Both FASB and the International Accounting Standards Board (IASB) have a broad mission in overseeing businesses with regard to financial reporting. They also both have the power to create new standards, interpret existing ones, develop compliance for these standards, and ensure that reporting entities (companies) implement these standards properly.
The main difference between the two is that FASB bases its decisions on US financial accounting rules, whereas the International Accounting Standards Board makes its decisions based on international financial accounting principles.
Another area where they differ is in their organizational structure. The Financial Accounting Standards Board is a private, non-profit organization created by the Securities and Exchange Commission (SEC). The International Accounting Standards Board is an independent, international organization.
The FASBs focus is on establishing GAAP while the IASB has a broader responsibility to develop standards that would increase harmonization of international accounting standards across different countries.
The Bottom Line
In conclusion, the Financial Accounting Standards Board was created by Congress by passing the Securities Exchange Act of 1934, which allowed the SEC to have full authority over Generally Accepted Accounting Principles.
The FASB’s main goal is to design new and effective reporting guidelines for all companies that sell goods or services in the United States. Their secondary role includes oversight regarding changes to GAAP (Generally Accepted Accounting Principles) as Congress may request, so they can implement more effective legislation as a result.
The FASB, at the moment, is more focused on making sure companies report their financial facts in a way that is consistent from year to year. The IASB has a broader focus on increasing the harmonization of international accounting standards across countries and establishing GAAP globally.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.