5. FASB Accounting Standards

Description of Publication: FASB: Generally Accepted Accounting Principles

According to most accounting experts (e.g., Robert May, et al. Accounting), financial statements that a U.S. business publishes and distributes to outsiders must conform to professional standards called Generally Accepted Accounting Principles (GAAP). Before the mid-1930s, GAAP consisted of a relatively few foundation elements that had evolved over several centuries. Considerable judgment was required to apply GAAP to individual businesses and circumstances. In fact, managers of U.S. firms made most judgments regarding what constituted GAAP and how financial statements were to conform. After the stock market crash of 1929 and the ensuing Great Depression, however, many abuses of the system were discovered. Although the crash and depression were not caused by accounting abuses, such abuses apparently were considered contributing factors. In the mid-1930s, the U.S. government passed the Securities Act of 1933 and the Securities and Exchange Act of 1934. Both acts gave the newly formed Securities and Exchange Commission (SEC) the authority to set accounting standards for financial statements filed with the SEC, affecting virtually all publicly owned U.S. corporations. The SEC turned to the accounting profession, represented by the American Institute of Certified Public Accountants (AICPA). The AICPA's Committee on Accounting Procedure (CAP) and later its Accounting Principles Board (APB) set standards for financial statements until 1973. In 1973, the Financial Accounting Standards Board (FASB), a new body independent of the AICPA, was formed to bring representatives of businesses and users of financial statements, as well as CPAs, directly into the standard-setting process.

According to the FASB director of research and technical activities, it is the job of the FASB to publish its FASB Accounting Standards-Original Pronouncements (in two volumes) with the intent of communicating consensus and pronouncements on issues relating to accounting. This has been done from FASB's inception in 1973 to the present. The first volume depicts the FASB statements. A status page at the beginning of each pronouncement identifies (a) the source of changes to the pronouncement, (b) other pronouncements affected by that pronouncement, and (c) the effective date. The status page also identifies, where applicable, other interpretive pronouncements and releases that further clarify that pronouncement. In addition, the status pages of applicable pronouncements reflect either the impact of a given pronouncement on an Emerging Issues Task Force (EITF) issue or the relationship of an EITF issue to a given pronouncement.

The Comprehensive GAAP Guide (ISBN 0-15-601815-2), published by Harcourt Brace Jovanovich in Orlando, Florida, contains all the promulgated and many of the nonpromulgated accounting principles in use today. Each promulgated pronouncement is thoroughly reviewed in a comprehensive format that is easy to assimilate and understand. Many chapters contain in-depth illustrations on the application of the specific accounting principle. Important nonpromulgated accounting principles have been integrated throughout the text in an effort to provide a more complete picture of the material.

The second volume contains the following materials issued by the American Institute of Certified Public Accountants or its committees through June 1973 and by the FASB to the present.

Accounting Research Bulletins.

Accounting Principles Board Opinions.

Interpretations of Accounting Research Bulletins and Accounting Principles Board Opinions.

FASB Interpretations and FASB Technical Bulletins.

FASB Statements of Financial Accounting Concepts.

The books use a shading technique to alert the reader when paragraphs containing accounting standards have been amended or superseded. All terms and sentences that have been amended or superseded are shaded. Paragraphs and subparagraphs that have been amended simply by the addition of terms, sentences, or new footnotes are marked with a vertical solid bar in the left margin. A status page at the beginning of each pronouncement identifies (a) the source of changes to the pronouncement, (b) other pronouncements affected by that pronouncement, and (c) the principal effective date (still want to be a CPA?). The CAP issued 51 Accounting Research Bulletins, the APB issued 31 Opinions, and the FASB has issued over 100 Statements of Financial Accounting Standards by the early 1990s. As a consequence, GAAP now includes the original foundation elements, those that have evolved over centuries, plus an ever-expanding set of authoritative pronouncements on the ways to apply them to specific situations.

Perhaps the most important feature of this guide is its readability. Considerable care has been exercised to avoid incomprehensible language. Sentence structure has been simplified as much as possible to foster the maximum comprehension in a minimum period. Finally, an innovative "Disclosure Index" contains both required and recommended disclosures currently in use. This index has been designed to assist the preparer or reviewer of financial statements in determining whether necessary disclosures have been made.

Something to Think About

Can you cite some of the functions of the FASB Emerging Issues Task Force?

FASB: Generally Accepted Accounting Principles
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FASB: Generally Accepted Accounting Principles

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