The Role of FASB as an Accounting Setter - Essay Example

Key Words: Financial Accounting, Standards, Organization, Investors, Accounting Standard-Setters, Lease accounting standard, FASB, The role of FASB as an accounting setter Introduction In US, FASB assumes the role of both devising and altering various accounting standards (“FASB”). Hence, it helps in fostering financial accounting, effective preparation of diverse reports by nongovernmental parties, which brings about effective basis for decision making especially by the investors. However, its conduct in the recent past has raised intense debates across the state especially by the affected entities, for instance, commerce industry (investors and banks) and educational institutions (“FASB”). This is due to “untimely” or constant alterations and implementation of new standards yields to confusions not only in the commerce industry but also in financial education institutions. Therefore, this persuasive study seeks to address whether FASB has the mandate of altering financial standards every time they see a new and suitable method besides other related questions. According to Ochoa, FASB since its establishment has constantly altered and devised new standards with the intention of increasing financial accounting and reports presentation. However, these actions to date have led to intense controversies and eventually intense debates especially in the corporate sector where CEOs find their actions held to certain limits. For instance, when the FASB started operating in the1970s “…..the organization immediately found itself in the middle of controversy when it proposed a trio of accounting changes” (Ochoa 495). These changes aimed at ensuring corporate CEOs’ did not make “….smooth earnings” during their respective fiscal durations (Ochoa 495). To numerous corporations and especially those who did not enjoy benefits of the then implementation policies, this translated to be discrimination in the name of revising accounting standards. This norm also recurred in 1980s when the body changed their standards again proposing that corporations ought to consider employees’ benefit pensions to appear as liabilities in their booking (Ochoa 495). Consequently, this adversely affected numerous firms besides prompting some to result in mischievous data manipulations with the intention of favoring their interests (Ochoa 495). Despite all its efforts meant to attain heightened effectiveness in accounting procedures, FASB has prompted numerous corporations to incur unnecessary loses. Since, this could not have occurred if the organization considered its actions carefully before implementing them. This is evident in the recent standards’ alterations, which entailed revising lease accounting hence, eliminating the “…distinction of capital and operating leases” (Ochoa 495). According to Ochoa, this step would negatively affect corporations because of high levels of debts that would characterize their balance sheets caused by prolonged impact of lease payments. Hence, comprise of numerous standards alterations that the FASB implements without adequately considering whether they have any effect on corporations or not. This is regardless of both CEOs and managers being vocal concerning what they will experience once the body decides to implement diverse accounting standards. Hence, making FASB, seem as forcing regulations onto the involved parties that would incur loses despite initially seeking their contributions or responses regarding certain standards. Probably, this is because of FASB is covered from law or court challenges that limit other Standards setters, for instance, FTC, APE and FCC (Ochoa 506). Therefore, based on the controversies so far caused by FASB since its establishment, the organization ought to be both transparent and predictable while adopting new financial standards. This is because of its altering of standards has provoked numerous corporations and especially new entrants (investors) incur untold loses or costs while trying to adapt to either set or emerging standards. For instance, the recent released proposals about “Discontinued Operations” whereby FASB demands investors and other players in these brackets to embrace new policies that will ensure adequate disclosures (“FASB”). Hence, ensure transparency in all the corporations’ financial reporting. This is by capturing only the necessary “strategic shifts” as discontinued operations besides enhancing disclosures regarding essential organizations of all organizations (“FASB”). However, this step has raised numerous complaints especially among the investors citing numerous asset disposals falling under discontinued operations based on the current standards (“FASB”). Hence, they result to financial computations that are both less pertinent and too costly for the investors while preparing them (“FASB”). In response to this argument, FASB Chairman Leslie F. Seidman argued the organization is currently working diligently to come up with appropriate measures meant to capture significant disposals (“FASB”). This action by FASB and confessing after already implementing certain standards without the absence of careful consideration exhibits the organization’s extreme powers (“FASB”). Therefore, FASB ought to alter standards in consultation with the involved parties despite authorization of the mandate of enforcing their policies without influence from any state’s organ, for instance, court. In addition, based on the controversies so far evidenced due to FASB’s altering its standards, this has relayed a remarkably different implication to the investors. Since, most of them deem this organization is out to discriminate them while favoring certain firms, especially those belonging to the nationals benefit while on their part incurring losses (Ochoa 495). Most of these investors especially CEOs and mangers cite they do not stay for long once they have learned certain standards before FASB changing them altogether. Hence, resulting to readjustments, which entail learning and ensuring they have updated knowledge of their work force with the right information or sometimes opting to hire new people. This is extremely pricey on the part of some investors, especially those who are new entrants to the state’s market. They cite FASB despite constantly working close to the benefit of investors, it contributed significantly to the 2008 financial crisis. This is especially via its continued altering of financial standards that were evident in banking regulators (Barth & Wayne 399). However, FASB defends itself contending the mode of setting diverse standards is inclusive. This is via encouraging “…..investors to participate in the accounting standards process by providing comments on discussion papers and exposure drafts that are issued at various stages of the FASB’s projects” (Carmichael & Lyn ford 24.5). This inclusive, nature is also mentioned by Tammy in her article where she is informing people about online FASB forum meant for concerned parties to submit their suggestions as well as responses. However, there is no concrete evidence showing fruits of the conclusive nature via considering any of the suggested opinions by the involved parties or even availing free FASB publications to the public. This is because of the investors’ complaints that have led to the current debate, whereby involved parties have assumed different sides regarding FASB standards’ issue. Some hold to the opinion that FASB ought not to implement new policies or standards because of this not only affects banking industry but also investors. In addition, this group argues suppose altering of financial standards is inevitable, they should be after reasonable intervals. The group supporting these changes cites transparency being one of the benefits, which FASB standards avails to the financial reporting though they fail to consider confusions and losses incurred by respective parties while trying to align with the new restrictions. FASB despite exhibiting failure in both implementing and setting varied standards in the past, it maintains a strong will in ensuring ample business environment especially for the investors. This encompasses one of the organization’s key roles meant to determine, which standards to use and disregard though after keen considerations. Hence, “…FASB’s Conceptual Framework states the primary objective of financial reporting provides information useful to investors and creditors for decision making” (Seay & Woods 6). This information enables investors to shun incidences that may yield to incurring unnecessary losses or at some incidences collapsing. Consequently, this prompts FASB to constantly change certain standards, which it deems would not appropriately align with the current competitive economy. In addition, the organization acts out of pressure mainly from the congress through SEC, though this ought not to be the reason. On this issue Albrecht (13) argues “….the FASB is charged with creating the rules that dictate financial reporting practices, the SEC is always looming in the background, legally authorized to take over the setting of U.S accounting should the FASB lose its credibility with the public.” This is an immense political influence emanating from the SEC, which the organization ought to evade only via focusing on doing its best though this complicates issues even further. For instance, Carmichael, Whittington and Graham in their book argue that excessive emphasis on availing adequate information to the public corporations overlook predicaments affecting private sector and investors. Therefore, this puts FASB into a dilemma whereby the organization continues “…to focus on needs of more sophisticated users and will issue standards that may be difficult for private companies to implement” (Carmichael, Whittington & Graham 1.20). This implies there are no predictable improvements in the future on the part of firms who welcomed the recent and current changes. Most of these firms include investors and private corporations whereby due to political influence via SEC, will continue to suffer in terms of incurring immense losses. However, the affected firms’ success will depend on their capability to rebound and adapt to the prevailing changes, hence attain heightened competitive advantage in their specialized fields. FASB’s despite having the mandate of both determining and implementing new accounting standards, the organization ought to liaise with state’s involved parties. These encompass auditing, issuers, investment and educational institutions whereby the latter plays a key role in molding financial experts (Thomas & Benton 392). This is to ensure both financial experts, trainees and the entire public understands as required diverse financial reports that represent the state’s interests (Gary & Curtis 61). However, the diverse standard alterations so far FASB has devised and implemented have posed adverse effects. This is especially to the educational and financial institutions especially in the mode of interpretation besides considering certain aspects like Lease payments. Therefore, FASB before devising or implementing any standard ought to consider its implications, hence enabling US trade jointly with other global states tackling different financial related predicaments. This is because of the state’s financial standards are only relevant where the financial experts are able to interpret various data related to the financial issues (Gary & Curtis 61). However, this is only possible if FASB formulate and execute standards with sobriety without heeding to political influences especially from the SEC (Albrecht 13). Mainly, this entails timely and effective premeditated alterations, coupled advance informing of the respective parties whom the alterations will affect them. Hence, alerting them such that they will not incur losses while trying to hire personnel conversant with the implemented standards or prompting managers to plan to go back to the learning system. This is to ensure they update themselves with the new policies or standards. Most especially the foreign investors who are new entrants in the American market where one ought to effectively understand financial standards already in use. However, despite the mandate they have in implementing diverse financial policies, FASB ought to adopt predictable intervals without resulting to any standard or method that seems suitable at certain times of a state’s economy. Since, this not only affects the education system but also the rate of investment, hence barring certain investors from entering into the new markets due to lack of information. In the quest to implement or devise new standards, FASB ought to “…..provide guidance in applying Accounting Research Bulletins, APB Opinions, and FASB statements and interpretations and guidance for resolving issues that are not directly addressed in those pronouncements” (Weiss 2.04). Hence, avail adequate information both to the public and affected parties concerning reasons behind their action (Burkholder 407). This is via clarifying or elaborating certain areas/sections, which to the involved parties may seem unfathomable, for instance, how the new standards will effectively apply when dealing with corporations outside Americans boundaries (Weiss 2.04). Additionally, the organization should be in a position to state or outline purposes of the new devised or altered standards especially to the investors. This is because the majority of the investors cite the financial setter, as always out to discriminate against them. This is through introducing new standards meant to bar them from understanding, accessing the necessary information or emerging with certain ways of reporting and presenting their financial data, for instance, discontinued operations (“FASB”). In explaining its actions, FASB according to the set guidelines, usually highlights certain areas of the new standard, which are not clear whereby the involved parties might misunderstand them due to their complexity (Weiss 2.04). For illustration, these areas encompass sections concerning certain industries or sectors whereby the already devised standards have not stated guidelines. Hence, the organization assumes the responsibility of availing adequate clarifications to both investors and affected parties. The main intention encompasses shunning future complaints citing FASB discriminating some entities or parties and favoring others (Weiss 2.04). In addition, expounding of certain areas or sections of the devised standards by FASB essentially acts a way of eliminating ambiguity among investors in the financial field (Thomas & Bento). This exercise extends to the degree of informing investors on how to carry out trade transactions not only in American but also in other global regions, for instance, Europe. Therefore, investors ought to understand conventional standards so that they may be able to learn and interpret information from other regions where they may intend to venture either establishing branches or trade. Undeniably, the global economy is undergoing rapid transformations besides encountering new challenges, which old financial standards could not handle them effectively except the emerging of updated strategies. However, this does not guarantee FASB constantly altering the existing financial standards devoid of proper considerations (“FASB”). Therefore, FASB ought to have a certain set duration meant to review its standards. This enables the involved parties to make a successful transition from one standard to another without confusions. Besides, maintaining certain standards for a predetermined duration saves both industries and financial institutions from incurring losses (Thomas & Bento). Mainly, this is especially when trying to equip themselves (managers and CEOs) with the necessary standards, which their respective fields entail them to know. Maintaining financial standards for a determined duration will also ensure financial institutions have uninterrupted syllabus, whereby experts will learn what they will find in the field. Conclusion FASB despite charged with the mandate of devising and altering of standard to comply with the current global economy demands, it has prompted certain sectors incur immense losses. These encompass spending colossal amount of money while trying to educate their personnel or opting to hire new employees. This is because of FASB based from the past records has resulted to varied strategies that have prompted involved parties incurring losses (Thomas & Bento). For illustration, investors who deem in the recent past perceived FASB’s actions meant to segregate them. This is especially via altering financial standards or denying them the necessary information essential in making informed decisions. Some of the alterations so far evidenced encompass devising modes of reporting and presenting financial data whereby at some point FASB advocated corporations to adopt “Discontinued Operations” aimed at increasing transparency. To shun this, FASB ought to maintain a predictable mode of either devising or altering financial standards. This entails having certain specified durations, which they it ought to stay with a certain standard instead of resulting to any emerging approach. In addition, it ought to provide explicit information to the involved parties especially those pertaining certain sections or areas whereby the main codes do not elaborate as necessitated. Work Cited Albrecht, W S. Accounting, Concepts & Applications: What, Why, How of Accounting. Mason, OH: South-Western/Cengage Learning, 2011. Print. Barth, Mary E., and Wayne R. Landsman. "How Did Financial Reporting Contribute To The Financial Crisis?." European Accounting Review 19.3 (2010): 399-423. Business Source Complete. Web. 31 Mar. 2013. Burkholder, Steve. "FASB Chief, SEC Top Accountant Discuss IFRS in U.S., FASB Role." Accounting Policy & Practice Report 8.10 (2012): 407-8. Web. 31 Mar. 2013. Carmichael, D. R. & Lynford, Graham. Accountants Handbook, Special Industries and Special Topics: Special Industries and Special Topics. New York: Wiley, 2012. Internet resource. Carmichael, D. R., Whittington, Ray, O & Graham, Lynford. Accountants Handbook, Financial Accounting and General Topics. John Wiley & Sons Inc, 2012. Print. Financial Accounting Standards Board-FASB. News Release 04/02/13: FASB Proposes Improvements to Reporting Discontinued Operations. 2013. Web. 8Th April 2013. Gary, Porter, A. & Curtis, Norton, L. Financial accounting: the impact on decision makers. Australia ; Mason, OH : South-Western Cengage Learning, 2011. Print. Ochoa, Omar. "Accounting for FASB: Why Administrative Law should Apply to the Financial Accounting Standards Board." Texas Review of Law & Politics 15.2 (2011): 486-522. Web. 31 Mar. 2013 . Seay, Sharon S. & Woods, Janet. "The Economic Impact of FASBs Proposed New Lease Accounting Standard." Journal of Finance and Accountancy 8 (2011): 1-14. Web. 31 Mar. 2013 Seay, Sharon S. & Woods, Janet. "The Economic Impact of FASBs Proposed New Lease Accounting Standard." 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