FASB

Definition

The Financial Accounting Standards Board (FASB) is a private, non-profit organization responsible for establishing and improving financial accounting and reporting standards in the United States. Its mission is to ensure that financial statements are transparent, reliable, and comparable across different entities, impacting areas such as revenue recognition, lease accounting, and the treatment of financial instruments.

5 Must Know Facts For Your Next Test

1. FASB was established in 1973 and has since played a crucial role in developing the standards that govern financial reporting in the U.S.
2. The board operates under the oversight of the Financial Accounting Foundation (FAF), which ensures its independence and integrity.
3. FASB issues Statements of Financial Accounting Standards (SFAS), which provide guidelines on how specific types of transactions should be accounted for.
4. The FASB is also involved in ongoing projects to converge U.S. GAAP with IFRS to improve consistency in financial reporting globally.
5. Public input is considered during the standard-setting process, ensuring that the views of various stakeholders are taken into account.

Review Questions

• How does FASB influence financial reporting standards and what implications does this have for businesses?
  • FASB influences financial reporting standards by establishing guidelines that companies must follow when preparing their financial statements. This ensures consistency and transparency in reporting, which helps investors and stakeholders make informed decisions. Businesses must adapt their accounting practices to align with these standards, impacting how they recognize revenue, report liabilities, and disclose information related to warranties or complex capital structures.
• Discuss how FASB's standards impact the accounting treatment of warranties and intraperiod tax allocation.
  • FASB's standards dictate how companies should account for warranties by requiring them to estimate warranty liabilities based on expected future costs. This ensures that financial statements reflect an accurate liability for potential future claims. Additionally, FASB's guidelines on intraperiod tax allocation require companies to allocate income tax expense between continuing operations and discontinued operations or other comprehensive income, providing a clearer picture of the tax effects on various components of income.
• Evaluate the role of FASB in addressing complex capital structures and embedded derivatives in financial statements.
  • FASB plays a critical role in setting standards for accounting for complex capital structures, such as convertible debt or preferred equity, ensuring that these instruments are accurately reflected in financial statements. The board also provides guidance on embedded derivatives, which are features within contracts that can affect cash flows based on changes in underlying variables. By establishing clear rules on these issues, FASB helps maintain transparency and comparability across different entities, enabling stakeholders to better understand the risks and potential returns associated with such financial instruments.

Related terms

GAAP:

Generally Accepted Accounting Principles are the standard framework of guidelines for financial accounting used in the United States.

IFRS:

International Financial Reporting Standards are accounting standards developed by the International Accounting Standards Board (IASB) that are used internationally.

Accounting Standards Update: A document issued by FASB that provides new guidance or changes existing guidance related to accounting principles.