The Financial Accounting Standards Board (FASB) is an independent, private-sector organization that establishes financial accounting and reporting standards in the United States. Its standards make up US generally accepted accounting principles (GAAP), which apply to public companies, private companies and not-for-profit organizations. The FASB is based in Norwalk, Connecticut, and its sister body, the Governmental Accounting Standards Board (GASB), sets the equivalent rules for state and local governments.
Although it is not a government agency, the FASB's standards carry legal weight for listed companies because the Securities and Exchange Commission recognizes them as "generally accepted" for filings under federal securities law. Many state boards of accountancy and the AICPA also recognize the FASB as the authoritative standard-setter for non-public entities.
History
Before the FASB, US standards came from committees of the accounting profession. The Committee on Accounting Procedure issued Accounting Research Bulletins from 1939, and the Accounting Principles Board issued Opinions from 1959 to 1973. The APB was criticized for being too slow, too close to the large accounting firms and too part-time. A study group chaired by former SEC commissioner Francis Wheat recommended a full-time, independent body, and the FASB began work in 1973. The SEC formally recognized its pronouncements the same year. After the Sarbanes-Oxley Act of 2002, the SEC reaffirmed that recognition and the FASB gained an independent funding source through fees paid by public companies, reducing reliance on contributions from the firms it regulates.
Structure and governance
The FASB is overseen by the Financial Accounting Foundation (FAF), a nonprofit whose trustees appoint board members, fund the organization and protect its independence. The board has seven full-time members drawn from auditing, corporate reporting, investing and academia, who must cut ties with former employers while serving. They are supported by a technical staff and by advisory groups, including the Financial Accounting Standards Advisory Council, the Investor Advisory Committee and the Private Company Council, set up in 2012 to consider alternatives for private companies.
How standards are made
The FASB follows a public due process designed to give all interested parties a voice:
- The board decides whether to add a project to its technical agenda, often after outreach or an invitation to comment.
- Board decisions are made in public meetings, and the staff prepares research and analysis.
- An exposure draft is published for public comment, and the board may hold roundtables and field tests.
- After considering feedback, the board issues a final Accounting Standards Update (ASU), which amends the Accounting Standards Codification.
The Codification, which became the single source of authoritative nongovernmental GAAP in 2009, organizes thousands of earlier pronouncements into numbered topics, from ASC 105 on GAAP itself through industry topics in the 900s. Before it, practitioners had to search through Statements of Financial Accounting Standards, interpretations, staff positions and older APB and ARB documents.
Major standards and relationship with the IASB
Recent major FASB projects include ASC 606 on revenue recognition, ASC 842, which brought most leases onto the balance sheet, and ASC 326, the current expected credit loss (CECL) model, which has much in common with the expected credit loss approach in IFRS 9. The FASB also maintains the conceptual framework that underpins its standards, setting out the objectives of financial reporting and the qualities that make information useful.
From 2002 the FASB and the IASB worked on a convergence program, beginning with the Norwalk Agreement, to reduce differences between US GAAP and IFRS. The revenue standard was a joint product, though leases and credit losses ended up different. Full adoption of IFRS by US companies, considered by the SEC around 2008 to 2011, did not happen, and the two boards now cooperate more informally.
Criticism
The FASB has been criticized for producing rules that are complex and costly to apply, particularly for smaller private companies, and for being too slow on some issues. It has also faced political pressure, most notably over stock option expensing in the 1990s and fair value accounting during the 2008 financial crisis, when Congress pushed for relief on mark-to-market rules for banks. Supporters argue that its independence and open process remain essential to trustworthy financial statements.