This video describes the structure and role of the Financial Accounting Standards Board (FASB). The FASB is a nonprofit organization that creates accounting standards for companies in the United States. The FASB has seven board members that are appointed by the Financial Accounting Foundation, which oversees the FASB’s activities. FASB board members serve a 5-year term and work for the FASB full-time (they must sever ties with their former employer). The FASB board members periodically issue a new accounting standard, which is referred to as an Accounting Standard Update (ASU) because it amends the Accounting Standard Codification (ASC).
FASB stands for “Financial Accounting Standards Board.” The FASB is the accounting standard-setter for the United States. This means the FASB makes the accounting rules (Generally Accepted Accounting Principles, aka GAAP) for U.S. companies.
The FASB is a private organization; it is not a government agency. While the Securities and Exchange Commission (SEC) technically has the authority to create the accounting rules in the United States, it has delegated this responsibility to the FASB (wouldn’t it be nice if you could “delegate” part of your job to someone else?). Because the SEC is a government agency and the FASB is a private organization, the arrangement is often referred to as a “public-private” partnership.
The FASB consists of 7 board members who are supported by technical staff. Board members are chosen by a different private organization called the Financial Accounting Foundation. FASB board members, who do not have to be accountants but usually are, serve a 5-year term and are eligible to serve an additional 5-year term if they behave themselves (never tell anyone that accounting is boring, bring pizza to board meetings, etc.). Board members are required to sever ties with their former employer (to ensure they are independent) and work full-time for the FASB (this isn’t a side gig like deejaying weddings or being a certified life coach).
The creation of accounting rules can get political, with companies often arguing that a regulation requiring additional disclosures would lead to increased costs, confusion among investors, and the end of the world. In some cases Congress has even become involved and influenced the standard-setting process (e.g., whether companies should have to expense stock options). But generally speaking the FASB has control and creates the accounting rules after soliciting input from companies, professional organizations, and the general public. Here is a quick overview of the process:
The FASB board members decide whether to add a project to their agenda. They receive guidance from a group called the Financial Accounting Standards Advisory Council (FASAC) as well as the FAF. If a project is added to the FASB’s agenda, the FASB holds public meetings with industry leaders and other stakeholders. These meetings are sometimes referred to as a “roundtable discussion” because that sounds cool. After hearing input from stakeholders the FASB creates a rough draft of the proposed standard, which is called an “Exposure Draft.” Stakeholders are then invited to send the FASB comment letters to provide their feedback and/or yell at the FASB about how ridiculous the proposed standard is. The FASB board members take this feedback into consideration and may hold additional meetings. Finally, the process usually concludes with the FASB issuing the new accounting standard, which is referred to as an Accounting Standard Update (ASU) because it amends the existing Accounting Standards Codification (ASC). This entire process can take up to several years.
Bear in mind, the FASB makes accounting rules for the U.S., not the whole world. There is an international organization, creatively titled the “International Accounting Standards Board,” which creates International Financial Reporting Standards. The FASB was working with the IASB on a convergence project with the goal of one day having a single set of accounting rules for the whole world, but unfortunately the project has lost steam and it doesn’t look like it is going to happen anytime soon.