FASB

Definition

The Financial Accounting Standards Board (FASB) is an independent organization that establishes financial accounting and reporting standards for companies and organizations in the United States. FASB's standards, known as Generally Accepted Accounting Principles (GAAP), guide the preparation of financial statements, ensuring transparency, consistency, and comparability in financial reporting across different entities.

5 Must Know Facts For Your Next Test

1. FASB was established in 1973 to improve the clarity and consistency of financial reporting in the U.S.
2. The organization operates under the oversight of the Financial Accounting Foundation (FAF), which appoints its members and ensures its independence.
3. FASB issues Statements of Financial Accounting Standards (SFAS), which detail specific accounting principles and practices that must be followed.
4. Companies that are publicly traded must adhere to FASB's GAAP to ensure their financial statements are reliable for investors and stakeholders.
5. FASB is actively involved in converging U.S. GAAP with International Financial Reporting Standards (IFRS) to promote global consistency in financial reporting.

Review Questions

• How does FASB ensure consistency in financial reporting among different companies?
  • FASB ensures consistency in financial reporting by establishing a set of standards known as Generally Accepted Accounting Principles (GAAP). These principles provide a framework for preparing financial statements, ensuring that companies report their financial activities uniformly. This uniformity allows investors, regulators, and other stakeholders to compare financial information across different entities easily.
• What is the role of FASB in relation to the SEC and how does it influence public companies?
  • FASB plays a crucial role by setting accounting standards that public companies must follow when preparing their financial statements. The SEC relies on FASB's standards to maintain transparency and protect investors in the capital markets. As such, FASB's guidelines significantly influence how public companies report their financial performance and position, ensuring that they provide reliable and accurate information to stakeholders.
• Evaluate the impact of FASB's efforts to converge U.S. GAAP with IFRS on global financial reporting practices.
  • FASB's efforts to converge U.S. GAAP with IFRS aim to enhance the comparability of financial statements across international borders. This convergence is significant because it facilitates investment decisions by making it easier for investors to analyze companies regardless of their location. Additionally, as more countries adopt IFRS, U.S. companies may benefit from reduced compliance costs when operating internationally. Ultimately, this movement towards global standards can lead to a more unified approach to financial reporting, promoting greater transparency and trust in the global capital markets.

Related terms

GAAP: Generally Accepted Accounting Principles, a set of rules and standards used in the United States for financial reporting.

SEC: The Securities and Exchange Commission, a U.S. government agency that oversees securities transactions, activities of financial professionals, and the stock market to protect investors.

IFRS: International Financial Reporting Standards, a set of accounting standards developed by the International Accounting Standards Board (IASB) for use globally.