Financial Accounting Standards Board's Role - Assignment Example

Financial Accounting Standards Board of the Table of Contents Table of Contents 2 Introduction 3 Role of FASB 3 Authority 3 Financial statements 4 Impacted areas 5 Depreciation of assets 5 Limitations imposed by FASB 5 Common framework 7 Protection to business and stakeholders 7 FASB structure 8 Conclusion 9 References 10 Introduction The FASB (Financial Accounting Standards Board) is a non-profit institution in the US, which has been set up by Securities and Exchange Commission (SEC). The FASB board has developed the Generally Accepted Accounting Principles (GAAP) that helps in regulating financial activities of the public companies in the US. The primary aim of the organization is to monitor accounting and reporting practices of the public companies. This in turn ensures adequate transparency and fairness in reporting. Accounting reports are of significant importance to different interest groups such as, company’s shareholders, suppliers of material and finance, employees and the government. These reports are verified by such interest groups from time to time in order to oversee whether or not companies are using their funds and resources well. These reports are of significant importance to investors who take valuable decisions related to investment and financing. These reports reflect flow of fund in and out of the business. They reveal how a firm is utilizing its assets so as to facilitate sufficient productivity and revenue. The different standards established by the organization help companies to develop and maintain a well-structured accounting system (Whittington, 2008). Role of FASB The FASB plays an important role in monitoring and controlling business reporting and accounting practices in modern organizations. Some of these roles are discussed as follows (King, 2006). Authority FASB has adequate power to formulate different policies, but the organization does not have rights to impose them upon the companies. Enforcement of accounting standards falls under the jurisdiction of SEC. The standards set by the FASB are required to be followed by public companies in maintaining their books of accounts and financial statements. So, the organization acts as a leader to different corporate entities. The FASB takes necessary advice from SEC and American Institute of Certified Public Accountants (AICPA) for formulating or improving the different accounting standards. FASB is not required to consult with any business organization before setting accounting standards. Hence, the organization has superior authority over ways whereby companies maintain their accounts and financial reports (King, 2006). Financial statements The primary motive of standards established by the FASB is to ensure that organizations can develop their financial reports in such a manner that different interest groups can develop correct perceptions about organization’s financial structure. This facilitates stakeholders to make informed decisions. The standards are developed in a way, which promotes transparency in management of funds in a company and corresponding disclosure in the reports. The set standards help investors and creditors to evaluate the business correctly and estimate its standing for the future. The board of directors utilizes financial reports to take strategic financial decisions such as, expansion and diversification of the business. It is important for the financial statements to reveal a true picture regarding the business so that correct decisions can be taken. Financial statements are prepared not only considering the present performance, but also taking future performance of the business into account, as far as future projects and investments is concerned (King, 2006). Impacted areas The policies formulated by FASB impacts the manner in which different items are reported in books of accounts. Initially, companies were required to record the revenues earned only in the period wherein it receives the same. Later on, the policy was changed by FASB and companies were required to record their revenues for the period wherein it is earned in order to get accrued. This standard affects the way in which companies formulate their profit and loss statements and calculate total revenue for the period. It is important that all companies follow the same pattern of maintaining their accounting records so that comparison can be done easily. The manner in which accounts are maintained also influences decisions taken by the management (King, 2006). Depreciation of assets The FASB gives adequate scope to a business to select any suitable method of depreciation. It is necessary that the selected pattern of depreciation is consistently followed by the firm throughout life of the asset. The method selected for depreciation affects manner in which expenses are calculated, thereby influencing the residual revenue. Business concerns normally choose a method whereby lower taxes are incurred to them. Limitations imposed by FASB SFAS (Statement of Financial Accounting Standards) regulations control various business activities so that they can properly and correctly be recorded in the books. Statements 116/177 regulations in respect of non-profit organizations states that they are required to differentiate between contributions or donations received by them, which results in increase of permanently restricted, temporarily restricted and unrestricted categories of net assets. Non-profit organizations also need to recognize expiration of the restrictions imposed by donors. In order to comply with such restrictions, the organization is required to correctly recognize its receipts and categorize them as per the laid down rules by FASB (Wahlen, et al., 2000). SFAS 124 lays down certain restrictions in respect of investments of non-profit organizations. Investments held by such organizations should be recorded in the books based upon their fair values. As per the regulation, there are two kinds of securities that get affected, debt and equity securities. Gains or losses reported in respect of the investments are shown in a statement of activities as fall or rise in unrestricted net assets. However, restrictions imposed by the donors and stipulated laws are to be considered in this matter. The statements, standards, concepts, interpretations and bulletins published by the FASB are all directed towards controlling business activities financially. Only by managing funds as per the set regulations can a firm ensure that former are recorded in the books of accounts adequately. Some of the aspects that help FASB to regulate and limit business practices are discussed as follows. The FASB standards advocate that companies must value their assets and liabilities based upon their fair values. The standards also impose that there must be adequate disclosure in the books of accounts with respect of financial transactions of the company. Complete disclosure means that companies must not omit recording of financial transactions in its books of accounts. Every financial transaction is required to be fully documented by mentioning them in primary and secondary books of accounts. The transactions must also be recorded in different financial statements that measure net result of business operations. Hence, elaborate accounting pattern must be strictly followed by firms (Wahlen, et al., 2000). Accounting procedures also rely greatly upon predicative values such as, rate of inflation, discounting values and determining the cost of capital. It is essential that companies calculate such values in a true and fair manner taking into consideration current market and economic conditions. Business organizations are required to calculate future impact of various investments and projects. Predicting the inflow of cash, therefore, is essential for proper accounting (Wahlen, et al., 2000). FASB standards also give significant importance to the aspect of materiality. This concept emphasizes upon the idea that all types of financial information are of material importance for sustaining complete and correct accounting records. It has also been observed that accounting information is important for various interest groups in order to take important decisions and should be well-structured and clear (Wahlen, et al., 2000). Common framework The recent economic meltdown gave rise to the requirement of a common framework for maintaining and reporting of financial transactions. In a globalized economy, it becomes essential for companies to have similar interpretations regarding various financial aspects. This facilitates development of a common ground for business comparison and exchange of funds at similar values. In order to achieve such objectives, International Accounting Standard Board and the FASB have joined hands with aim to develop a common international framework for recording and maintaining financial statements. Protection to business and stakeholders FASB is a regulatory framework that ensures fair representation of company accounts. It helps to protect interest of different stakeholders who are associated with the business. It also protects the business itself from external forces. The stakeholders of a business are different groups who get affected by the various policies, profitability and financial performance of a firm. The stakeholders of a business are seen to verify company’s financial statements such as, profit and loss statements, Balance Sheet, Cash Flow and Fund Flow Statements. They also verify different statements showing the net result of business operations such as, company’s ratio analysis projections. Investors also verify a company’s capital budgeting techniques before investing in any particular project. Shareholders and individuals who provide fund to an organization are largely interested in the ability of a firm to generate profits. For interpreting so, they verify the company’s profit and loss statements and Balance Sheet. These statements help in determining how effectively a firm is utilizing its assets for generating revenue. Government authorities also verify accounting policies of a company in order to check whether company is paying taxes and other duties on a timely basis. The accounts of a company are also verified by the government officials to oversee if tax calculations have been done correctly (Lee, 2006). FASB structure The FASB consists of seven full time members. The members are not required to maintain any tie ups with any commercial institution. They are also required to severe all types of engagement with institutions that they had served previously. This helps in ensuring that officers of FASB have independent authority. The members of the FASB are selected by Financial Accounting Federation (FAF). The FAF governs various activities of the FASB and ensures organization’s affectivity. The members are generally appointed for a five year term. They are eligible to serve for another term if the association considers so. Apart from full time members, the organization also consists of 68 staff members. The staff comprises eminent professionals with relevant industry experience, who have been in the accounting field for several years. The officials are drawn from both governmental and non-governmental bodies (Colson, et al., 2009). Conclusion The FASB has also formed Emerging Issues Task force (EITF) that provides timely response towards different financial issues. The primary motive of the group is to provide prompt and adequate response to different financial issues that have already or are set to emerge in the economy. FASB, in general, also gives adequate importance to changing structure of conducting business. The organization implements amended rules as and when demanded by economic forces. FASB through its standards and concepts ensures that companies are able to represent their financial position and structure effectively so as to fulfill needs of the business as well as associated stakeholders. References Colson, R. H., Benston, G. J., Carmichael, D. C., Christensen, T. E., Jamal, K., Moehrle, S. & Watts, R. L. (2009). Response to FAF exposure draft,“Proposed changes to oversight, structure, and operations of the FAF, FASB, and GASB”. Journal of Accounting and Public Policy, 28(1), 51-57. King, A. M. (2006). Fair value for financial reporting: meeting the new FASB requirements. New Jersey: John Wiley & Sons. Lee, T. A. (2006). The FASB and accounting for economic reality. Accounting and the Public Interest, 6(1), 1-21. Wahlen, J. M., Boatsman, J. R., Herz, R. H., Jonas, G. J., Palepu, K. G., Ryan, S. G. & Skinner, D. J. (2000). Response to the FASB preliminary views: Reporting financial instruments and certain related assets and liabilities at fair value. Accounting Horizons, 14(4), 501-508. Whittington, G. (2008). Fair value and the IASB/FASB conceptual framework project: an alternative view. Abacus, 44(2), 139-168. Read More