SUBJECT: FASB, Financial Accounting Standards Board

Alphanumeric Identifier:

BRIEF DESCRIPTION: The Financial Accounting Standards Board is the self-regulating accounting body that is responsible for developing new financial accounting standards. These standards are the framework that firms follow to publish their annual activities in the form of a set of financial statements.

KEYWORDS: GAAP, Accounting, Financial Statement, FASB, FAS

REFERENCES (required):

Books

• Chasteen, Lanny; Flaherty, Richard. 1998. Intermediate Accounting. McGraw-Hill.
• Miller, Paul. 1988. The FASB: The People, The Process, and the Politics. Irwin.
• White, Gerald; Sondhi, Ashwinpaul; Dov, Fried. 1998. The Analysis and Use of Financial Statements. Wiley.
• Van Riper, Robert. 1994. Setting Standards for Financial Reporting: FASB and the Struggle for Control Process. Quorum Books.

• Articles

• Calabro, Lore. "Farewell to FASB." CFO 48(5): May 1997.
• "SEC, FAF and Others Clash on Independence." Journal of Accountancy 16(2): August 1996.

• • Web Sites

• http://www.aicpa.org/ -- Official web site for the American Institute of Certified Public Accountants
• http://raw.rutgers.edu/raw/fasb/ -- Official web site for the Financial Accounting Standards Board
• http://www.sec.gov/ -- Official web site for the Security Exchange Commission

OVERVIEW:

Generally Accepted Accounting Principles (GAAP) are developed for the primary purpose of providing a consistent and comparable framework for the reporting of financial information to external market participants. Certified Public Accountants (CPAs) are required to follow GAAP in all financial accounting matters (unless extraordinary circumstances should warrant otherwise).

Since 1972, the Financial Accounting Standards Board (FASB, pronounced faz-bee) has been the primary party responsible for developing and implementing GAAP. The organization serves as a self-regulating body that addresses accounting issues and policies accountants' actions. The FASB is comprised of seven members having extensive public accounting experience. The FASB periodically holds public hearings to address significant accounting issues as they arise and then proposes and eventually adopts new Financial Accounting Standards (FASs) to address these issues. These FASs are numbered sequentially as they are issued and immediately become an integral component of GAAP upon their enactment. As of today, the FASB has issued over 135 FASs.

Only firms whose stock are publicly traded or who are seeking external financing need to follow GAAP. Additionally, since GAAP is designed for external reporting, management does not need to follow GAAP for internal reporting purposes. However, management must always be aware of how operational decision will affect the financial statements of the firm, for it is through these financial statements that management is evaluated in the stock market.

Currently, the FASB requires that companies who report financial results must do so using a set of financial statements. These statements are comprised of a Balance Sheet, Statement of Cash Flows, and the Income Statement. The Balance Sheet can be thought of as a "snapshot" of the company's assets, liabilities and owners' equity as of a single point in time. The Balance Sheet contains information regarding the amount of inventory, receivables and fixed assets employed by a firm. As a rule, assets are reported using a historical cost basis. In other words, the purchase price of an asset will be used for reporting purposes throughout the life of the asset. Thus, assets are not reported using fair market values. The Statement of Cash Flows can be thought of as a detailed disclosure of the sources and uses of cash in operations, investing activities and financing activities over the course of the year. The Income Statement is used to report what activities the firm engaged in over the course of the year. The Income Statement measures the efficiency of the firm's operations by disclosing sales, cost of goods sold and operational costs that have been incurred. (Please refer to the attached appendix for a more detailed breakout of the components of a set of financial statements.)

Since financial statements report the activities of the firm as a whole, the accounting detail is usually not sufficient to obtain an adequately detailed picture to measure the efficiency of different processes or even of an entire plant. Therefore, management most often engages in additional internal accounting activities (also known as managerial accounting) to disaggregate the financial data to better enable line staff to manage their individual centers. With this said, financial statements still provide a good means for management to measure trends of a firm, to analyze the relative activities of a firm (also known as ratio analysis), or even to compare one firm against another for benchmarking purposes.

Original submitted by Conard as part of requirements for OM 742.