The Financial Accounting Standards Board (FASB) is a non-profit association that designs and revises the generally accepted accounting principles (GAAP). These rigorous accounting principles are used in the private sector during the preparation of mandatory financial reports that are given to shareholders, the public or government agencies.
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How Did the FAS Board Originate?
The FAS Board was established in 1973 by the Securities and Exchange Commission. Previously, there were semi-standard accounting principles that were overseen by the American Institute of Certified Public Accountants. However, unstandardized accounting practices resulted is semi-accurate financial reports and loopholes for financial fraud. In 2009, the Financial Accounting Standards Board released their Accounting Standards Codification, which increased the logical organization of the GAAPs into a more user-friendly format. Today, member of the FAS Board can easily access and references the codes through the FAB Board’s website.
What is the Structure of the Board?
The FAS Board is actually made up of independent professional bodies. First, the Financial Accounting Foundation (FAF) is an independent body that oversees, administers and finances the FAS Board. Their main goals are to protect the integrity and independence of the membership appointment and standard setting processes. Second, the FAS Board is advised by the Financial Accounting Standards Advisory Council on certain matters, such as procedures, processes and priority agenda items. The FAS Board itself is the third body that is tasked with improving financial reporting and accounting standards.
What are the GAAP?
The generally accepted accounting principles provide universal standards that all accountants are expected to follow. The goal of having GAAP is to provide financial reports that will help financial professionals and the public make informed financial decisions. They ensure that companies adhere to certain federal accounting regulations. As a result, there is improved financial transparency and accountability. They are also helpful with maintaining financial records and improving the overall performance of a business. Many investors, financial managers and executives incorporate GAAP-based reports into their strategic and risk management planning.
What are Fundamental Concepts of the GAAP?
The GAAP has four fundamental assumptions that include the topics of going concern, business entity, monetary unit and time-period principles. For example, the business entity means that commercial and personal expenses must be kept separate, and the monetary unit is generally the U.S. dollar. Next, there are four fundamental principles that cover historic costs, revenue recognition, matching and full disclosure. For instance, the historical cost principle mandates that companies report their asset and liability acquisition costs instead of reporting the fair market value. On the other hand, the revenue recognition principle states that companies must only record earned revenue, not received revenue. This forms the basis of accrual basis accounting. Finally, there are four fundamental constraints, which include objectivity, materiality, consistency and conservatism. To illustrate, the objectivity principle mandates that financial statements produced by the company’s accountants must be based on factual evidence. Conversely, consistency means that the company must use the same accounting methodology for every accounting period. Overall, the GAAP provides structured clarity and consistency in all aspects of accounting and financial reporting.
In summary, the FAS Board is an important governing body that ensures the highest commercial standards for accounting practices and financial reports. The FASB provides critical financial oversight of private sector accounting procedures which results in financial honesty and integrity.
