The Financial Accounting Standards Board, Advisory Boards, and the Emerging Issue Task Force

The role of the FASB in today's capital markets is to develop high- quality financial reporting standards that result in credible and transparent financial information in order to service the investing public. The FASB's financial accounting standard-setting process actually involves several entities: the Financial Accounting Foundation (FAF), the FASB Board itself, the FASB staff, and the Emerging Issues Task Force (EITF), as noted in Exhibit 2-5.

Exhibit 2-5 Organization of FAF, FASB, and GASB

Source: Modified from Accounting & Auditing Research: Tools & Strategies, 7th ed. Reprinted with permission of John Wiley & Sons, Inc.

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The seven-member FASB Board represents a broad spectrum of the financial community. It might include partners from large and small CPA firms, corporate executives, financial analysts, and an academic. The FASB pursues its investigative activities with a full-time research staff of approximately 60 to 70 professionals from various backgrounds. The FASB acquires advice from the Financial Accounting Standards Advisory Council (FASAC) on the priorities of its current and proposed projects, selecting and organizing task forces, and any other matters that the FASB requests. In addition to the regular FASB staff, the Board has several formal channels for gathering information in the standard-setting process, including various advisory councils and project resource groups. These information channels aid the Board when considering the appropriateness of current standards or conducting research for creating new accounting standards and include the:

1. Financial Accounting Standards Advisory Council (FASAC). Established in 1973 to advise the FASB on issues related to the FASB's agenda (current and new), priorities, and other matters. Membership can include CEOs, CFOs, executive directors, academics, senior partners, and analysts.
2. Investor Task Force (ITF). Established in 2005 to provide the FASB with sector-specific insight and expertise. Membership is comprised of the nation's largest institutional asset managers.
3. Investors Technical Advisory Committee (ITAC). Established as a strong technical accounting standing resource for the FASB. It aids with current projects as well as identifying financial reporting deficiencies to be examined by the FASB. Membership is comprised of investment professionals.
4. Not-for-Profit Advisory Committee (NAC). Established in 2009 as a strong not-for-profit standing resource for the FASB. Membership is comprised of individuals with financial accounting and reporting and expertise in the not-for-profit sector.
5. Private Company Financial Reporting Committee (PCFRC). Established in 2006 to represent all nonpublic business entities as to how the standard-setting process affects them. Membership includes four users, four preparers, and four CPA practitioners.
6. Small Business Advisory Committee (SBAC). Established in 2004 as a standing resource to represent the small business community with respect to FASB financial accounting and reporting standard development. Membership includes users, preparers, and auditors in the small business community.
7. Valuation Resource Group (VRG). Established in 2007 as a resource to the FASB with respect to fair value measurement implementation issues. Membership includes a broad spectrum of the accounting community.
8. Private Company Council (PCC). Established in 2012 to work in conjunction with the FASB to “determine whether exceptions or modifications to existing nongovernmental U.S. Generally Accepted Accounting Principles (U.S. GAAP) are necessary to address the needs of users of private company financial statements.” Membership includes users, preparers, and practitioners with private company financial statement experience.

To help practitioners and their clients implement the provisions of FASB Standards, the FASB staff periodically issued Technical Bulletins to provide timely guidance on implementation issues. These Technical Bulletins allowed conformity with FASB pronouncements without the need for the entire FASB Board to issue a new authoritative statement.

The EITF was established in 1984 to help answer questions by financial statement preparers and users about issues not clearly covered by an existing set of authoritative pronouncements. Chaired by the FASB director of Research and Technical Activities, the EITF consists of highly knowledgeable individuals with the foresight to identify issues before they become prevalent and conflicting practices regarding them become well established. The EITF normally addresses industry-specific issues rather than those encompassing accounting and financial reporting as a whole. For example, update No. 2011-07—“Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities” (a consensus of the FASB Emerging Issues Task Force) is specific to the health care industry.

If the EITF is unable to reach a consensus on an issue under consideration and decides that the problem merits further action, it will forward the file to the FASB Board for further deliberation. Conversely, if the EITF can reach a consensus on an issue, the FASB can usually infer that no Board action is necessary. Thus EITF's consensus positions are still included in the levels of U.S. GAAP for financial and state and local government reporting, and are now issued in sequential order along with other FASB authorities.

The FASB staff often receives questions regarding the appropriate application of FASB literature. Prior to the Codification (July 2009), the FASB staff issued application guidance through FASB Staff Positions (FSP) in order to more quickly and consistently respond to practitioners’ and users’ needs. After receiving approval from FASB Board members, a 30-day exposure period existed for interested parties to comment on a proposed FSP. The FSPs were posted on the FASB website (www.fasb.org) and remained there until incorporated into printed FASB literature. Prior to 2003, the FASB issued Staff Implementation Guides in response to such issues. Firms may still submit questions to the FASB regarding application of FASB literature through a Technical Inquiry Service form located on the FASB website. However, a staff member's response to a firm is not authoritative since the response is the staff member's opinion based upon submitted facts.

Statements of Financial Accounting Concepts Nos. 1–8

The conceptual framework project seeks to establish objectives and concepts (Statements of Financial Accounting Concepts [SFACs]) for the development of accounting standards and in the preparation of financial statements, especially where no published standards exist. The project's focus is to produce a constitution for accounting, resulting in a coherent set of accounting standards. SFACs are not considered authoritative. However, the researcher normally utilizes these pronouncements when no authoritative pronouncement is directly on point to the issue under consideration. In such cases, the researcher needs to develop a theoretical foundation for the solution to the problem.

The first eight Concept Statements issued under the conceptual framework project are as follows:

1. SFAC No. 1 was superseded by SFAC No. 8.
2. SFAC No. 2 was superseded by SFAC No. 8.
3. SFAC No. 3 was superseded by SFAC No. 6.
4. Objectives of Financial Reporting of Nonbusiness Organizations. SFAC No. 4 establishes the objectives of general-purpose external financial reporting by nonbusiness organizations.
5. Recognition and Measurement in Financial Statements. SFAC No. 5 establishes recognition criteria and guidance regarding what information should be incorporated into financial statements. It also describes and defines the concept of earnings and what should be included in a full set of an entity's financial statements.
6. Elements of Financial Statements. SFAC No. 6 redefines the 10 interrelated elements of financial statements: assets, liabilities, equity, investment by owners, distributions to owners, comprehensive income, revenues, expenses, gains, and losses. It also defines three classes of net assets for nonprofit organizations as well as accrual accounting and other related concepts. Besides amending portions of SFAC No. 2, SFAC No. 6 also supersedes SFAC No. 3.
7. Using Cash Flow Information and Present Value in Accounting Measurements. SFAC No. 7 provides a framework for using future cash flows as the basis for accounting measurements and for the interest method of amortization. It also provides general principles that govern the use of present value.
8. Conceptual Framework for Financial Reporting—Chapter 1, “The Objective of General Purpose Financial Reporting,” and Chapter 3, “Qualitative Characteristics of Useful Financial Information.” SFAC No. 8 sets forth the objectives of general-purpose external financial reporting by business enterprises (e.g., financial reporting should provide financial information about the reporting entity) and examines the characteristics of accounting information that make the information useful (e.g., relevance and faithful representation).

FASB SFASs and ASUs

The FASB Codification of accounting standards has superseded most accounting authorities.5 However, standards, now known as Accounting Standards Updates (ASUs), are still issued in a similar format with an additional section containing Codification update instructions. The previously issued standards themselves are no longer authoritative, nor are the ASUs, but both contain background information the practitioner may find of interest. ASUs amend the Codification but in and of themselves are not authoritative.

The FASB previously issued pronouncements labeled Statements of Financial Accounting Standards (SFASs) and Interpretations of Financial Accounting Standards, which interpret the FASB's own statements as well as predecessor authorities from the AICPA, Accounting Research Bulletins (ARBs), and Accounting Principles Board Opinions (APBOs). Changes to authoritative U.S. GAAP, labeled ASUs, include all prior forms of authoritative U.S. GAAP (e.g., FASB Statements and EITF Abstracts) and are issued in the format of year-sequential update number (for example, 2011-01, the first pronouncement issued in 2011). Typical archived SFAS standard content is as follows:

1. A summary
2. A table of contents
3. Introduction and other narrative
4. The actual standard
5. A list of the FASB members actually voting
6. The basis for a qualifying or dissenting vote of a FASB member
7. Appendices containing background information, a glossary of terms, numerical and other examples of applying the standard, and other ancillary information

Typical ASU content is as follows:

1. A summary including:
a. Why the update is being issued,
b. Who is affected,
c. The main provisions,
d. How the main provisions differ from current U.S. GAAP,
e. The effective date, and
f. How the main provisions compare to IFRS.
2. The specific amendments to the Codification including implementation guidance.
3. A list of voting members along with the basis for any dissentions.
4. Background information and basis for conclusions.
5. Amendments to the XBRL Taxonomy.

These basic elements are not necessarily presented as separate sections of the pronouncement. Those that are relatively short may combine the introduction and background information and eliminate the illustration of applications section if it is not a complicated principle. However, there is always a separate section designated as the Standard of Accounting or Amendments to the Codification. Codified FASB Statements include Codification Update Instructions. SFASs are archived and accessible through a navigation panel at the FASB Codification website (http://asc.fasb.org).

The introductory/summary section of a pronouncement defines the accounting issue that necessitated the pronouncement. This section gives the scope of the pronouncement, that is, it defines the type of entity affected. It can also limit the application of the pronouncement to companies of specific size (for example, sales exceeding $250 million). The introduction also gives the effects of the new pronouncement on previously issued standards. It specifies which pronouncements or sections of prior pronouncements are superseded by the new standard. Generally, within the introduction, there is a summary of the standard so the researcher can see quickly if the standard applies to the specific situation under investigation. ASUs also contain a comparison to IFRS.

The background information section describes in more detail the business events and related accounting treatments presented in the pronouncement. This section develops the various arguments supporting alternative approaches to resolving the issue. The underlying assumptions for these alternatives are defined, and the different interpretations of the economic impact of the business event are presented. The FASB generally places the background information in an appendix to the official pronouncement.

The basis for conclusion of the authoritative standard is described in the opinions, statements, and ASUs. This section explains the rationale for the accounting principles prescribed in the pronouncement, indicating which arguments were accepted and which were rejected. The FASB incorporates dissenting viewpoints at the end of its main section, Standards of Financial Accounting and Reporting, and positions the basis for conclusion in a separate appendix. The background information and basis for conclusion provide the researcher with a description of the business events and transactions covered by the pronouncement. These sections can help in determining if the pronouncement addresses the specific issue under investigation. If the researcher is in the early stages of investigation, these sections can help in defining the business transactions, determining their economic impact, and relating them to the proper reporting format.

The opinion, standard, or amendment to the Codification section prescribes the accounting principles for the business transactions described in the pronouncement. This section represents the heart of the official pronouncement. Accountants must follow it when concluding that the standard applies to the business transactions under investigation. The length of this section will depend upon the complexity of the business events involved. For example, the standard length varies from short, as in the case of ASU 2011-02, “Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” to very long and complicated, as in FASB ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”

The Effective Date section states when the new pronouncement goes into effect. It also identifies any transition period that a company might use to implement a new standard. For example, FASB Statement No. 13, “Accounting for Leases,” had a four-year transition period to permit companies to gather data for retrospective application of this complicated pronouncement. While some standards may take effect retrospectively, others take effect shortly after their issuance. If the Board prescribes the method of implementation, retrospective application, or prospective application, this section of the pronouncement will indicate the permissible method.

FASB Due Process

Given the importance of FASB standards, the Board uses an extensive due process. The standard-setting process followed by the Board appears in Exhibit 2-6. The FASB is held to a fixed procedure, and before issuing an ASU, it must take the following steps:

1. Identify the issue. The FASB identifies the problem or issue via a number of sources and takes into account legal or SEC pressures.
2. Issue consideration. The FASB decides whether to consider the issue and place it on the agenda. The board generally seeks opinions from the FASAC, advisory councils, project resource groups, and professional organizations such as the Financial Executives International (FEI), the Institute of Management Accountants (IMA), and the Risk Management Association.
3. Set up a task force. This step involves establishing a task force (usually about 15 people) to study the problem, investigate the issues, issue a discussion paper to interested parties (optional), hold public hearings, and request written comments on the issue. Several hundred responses are usually received.
4. Issue an exposure draft (ED). If action is appropriate, the FASB issues an ED, a preliminary ASU. The normal exposure period is at least 60 days but can be as short as 15 days for urgent matters.
5. Hold public hearings and analyze responses. The FASB holds public hearings and may request additional comments on the ED. Constituent responses (e.g., comment letters and public roundtable discussions) are analyzed to determine if a second ED is required or if an ASU should be issued.
6. Issue a final ASU. The last step in the FASB due process is to issue a final ASU that describes amendments to the Codification.

Exhibit 2-6 The FASB Due Process

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Having gone through this due process procedure, the FASB's final pronouncement is placed in the “authoritative” level of U.S. GAAP. ASUs and pre-codification SFASs are issued in a standard format as previously discussed and can be located at the FASB website (www.fasb.org), reprinted in the Official Release section of the Journal of Accountancy, and available in the FASB Accounting Standards Codification database.

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