Key takeaways
– The Financial Accounting Standards Board (FASB) is the independent U.S. private-sector organization that establishes accounting and financial reporting standards (U.S. GAAP) for public and private companies and nonprofit organizations.
– The U.S. Securities and Exchange Commission (SEC) recognizes FASB as the primary standard-setter for public companies; FASB’s output is published in the Accounting Standards Codification (ASC) and in Accounting Standards Updates (ASUs).
– FASB operates through a public, multi-step due‑process that includes research, public exposure drafts, comment letters and final standards; the Financial Accounting Foundation (FAF) oversees FASB.
– FASB collaborates with the International Accounting Standards Board (IASB) to improve global comparability but U.S. GAAP (FASB) and IFRS (IASB) remain separate frameworks.
– Practical actions for companies, auditors and users include monitoring ASUs and ASC changes, planning implementation, updating policies and systems, and educating stakeholders.
What is the FASB?
The Financial Accounting Standards Board (FASB) is an independent, private, nonprofit organization created to develop and improve accounting standards for U.S. entities so financial reporting is useful and comparable for investors and other users. FASB standards constitute generally accepted accounting principles in the United States (U.S. GAAP). The Financial Accounting Foundation (FAF) appoints FASB board members and provides oversight.
Authority and recognition
– SEC recognition: The SEC recognizes FASB as the designated body for establishing accounting principles for public companies.
– Broad acceptance: State accounting boards, the American Institute of Certified Public Accountants (AICPA), and many market participants rely on FASB’s standards.
– Codification: FASB’s Codification is the single authoritative source of nongovernmental U.S. GAAP.
Governance and structure
– Board composition: FASB is governed by seven full‑time board members appointed by the FAF for five‑year terms (renewable up to a limit).
– Advisory bodies: FASB is supported by advisory councils and task forces (e.g., Financial Accounting Standards Advisory Council — FASAC) and works with stakeholder working groups.
– Related bodies: The FAF also oversees the Governmental Accounting Standards Board (GASB), which sets standards for state and local governments.
How FASB develops standards — step-by-step
1. Agenda setting: FASB and its advisory councils identify and prioritize reporting issues for potential standard-setting.
2. Research and deliberation: Staff produce research and issue memos; the Board discusses alternatives in public meetings.
3. Public outreach: FASB seeks input through comment letters, public roundtables, and targeted working groups.
4. Exposure draft (or discussion paper): When appropriate, FASB publishes a proposed standard for public comment (typically 30–120 days).
5. Redeliberation: FASB reviews comments and may revise proposals in public sessions.
6. Final standard (ASU) and Codification amendment: FASB issues an Accounting Standards Update (ASU) that amends the Accounting Standards Codification (ASC), which is the authoritative text of U.S. GAAP.
7. Implementation support: FASB often issues implementation guidance, transition alternatives, and holds outreach to help stakeholders adopt the change.
Accounting Standards Codification and ASUs
– ASC: The Codification organizes U.S. GAAP into topics, subtopics and sections for research ease; the “professional view” requires subscription while a basic view is publicly accessible.
– ASUs: Accounting Standards Updates communicate changes to the Codification and explain background, rationale and effective dates.
FASB vs. IASB (U.S. GAAP vs. IFRS)
– Separate frameworks: FASB establishes U.S. GAAP; the International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS). The frameworks differ in approach, presentation and some measurement and recognition rules.
– Convergence efforts: Over time FASB and IASB have collaborated to reduce differences and improve comparability, but full convergence has not been achieved and many differences remain.
– Practical consequence: U.S. public companies file under U.S. GAAP (unless the SEC permits IFRS), while many non-U.S. companies use IFRS. Analysts and multinationals need to reconcile or translate between frameworks for comparability.
FASB vs. GASB
– FASB covers private and public companies and nonprofits (nongovernmental entities).
– GASB sets standards for state and local governments. Both are overseen by the FAF but operate independently.
Practical steps for stakeholders
A. For corporate finance and accounting teams
1. Monitor: Subscribe to FASB alerts, follow ASUs, and track effective dates in the ASC.
2. Assess impact: For each relevant ASU, perform a gap analysis (accounting policy changes, systems, data, disclosures).
3. Plan implementation: Prepare a project plan with timeline, roles, testing, and budget. Include transition method (retrospective, modified retrospective, prospective).
4. Update accounting policy memos and documentation: Revise internal policies, accounting manuals and financial statement note templates.
5. Systems and processes: Adjust ERP, reporting tools and data collection processes; validate calculations and reconciliations.
6. Train staff and stakeholders: Provide targeted training for accounting, FP&A, auditors and business units.
7. Communicate with auditors and board: Discuss material impacts, transition elections and disclosure plans early.
8. Test and disclose: Run parallel reporting where needed and prepare required transition disclosures and reconciliations.
B. For auditors and accounting firms
1. Follow ASUs and interpretive guidance: Update audit programs and risk assessments to reflect new standards.
2. Evaluate internal controls: Assess whether new recognition/measurement adds control risks.
3. Guide clients: Provide implementation support, recommend transition approaches and review disclosures.
4. Document judgments: Ensure audit documentation records management’s estimates and assumptions under new standards.
C. For investors and analysts
1. Track ASUs that affect comparability (revenue recognition, leases, financial instruments, etc.).
2. Adjust models: Revise revenue, lease-adjusted leverage, EBITDA, and other metrics to reflect ASC changes.
3. Read management’s disclosures: Look for transition methods, one-time impacts, and ongoing effects.
4. Ask targeted questions: Engage companies on accounting policy choices and impacts on trends.
D. For nonprofits and private companies
1. Confirm applicability: Some ASUs have differential effective dates for private entities and nonprofits.
2. Consider accounting alternatives: Evaluate available private company alternatives and practical expedients.
3. Budget for implementation: Smaller organizations may need outside consultants or software updates.
E. For preparers of government financial statements
– Use GASB standards (not FASB) for state and local government reporting; monitor GASB for government-specific topics.
How to stay current and influence standards
– Follow sources: FASB.org, the Accounting Standards Codification, ASUs, FAF announcements, and SEC staff releases.
– Participate: Submit comment letters on exposure drafts, attend or submit remarks for public roundtables and join advisory groups.
– Use professional resources: AICPA guides, Big Four publications, trade associations and continuing professional education (CPE) programs.
Common implementation pitfalls
– Late scoping: Failing to identify affected accounts, contracts or systems early.
– Underestimating data needs: New measurement bases often require historical or granular data not previously gathered.
– Weak internal controls: Not updating controls to cover new processes or estimates.
– Inadequate disclosure: Missing or unclear transition disclosures that hinder comparability.
– Poor stakeholder communication: Surprise changes can erode investor confidence.
Further reading and authoritative sources
– FASB — Official website and Accounting Standards Codification: https://www.fasb.org
– Accounting Standards Updates and implementation guides (available on FASB.org)
– Financial Accounting Foundation (FAF) — oversight of FASB and GASB
– Securities and Exchange Commission (SEC) — recognition of FASB and staff accounting guidance
– Investopedia: “Financial Accounting Standards Board (FASB)” (background primer) — https://www.investopedia.com/terms/f/fasb.asp
If you’d like, I can:
– Summarize the most recent ASUs that materially affect your industry,
– Create an implementation checklist tailored to your company’s situation (size, ERP, industry),
– Or draft sample disclosure language for a specific ASU and transition election.