The Financial Accounting Standards Board (FASB) is an independent organization that establishes the acceptable accounting standards. FASB’s has a set process involving ten steps for setting accounting standards. The process is designed to facilitate continuous improvement of accounting standards and incorporating a variety of viewpoints from stakeholders (FASB, n.d.). The process for setting standards shows the issues considered by FASB before introducing new standards and how the organization affects the business environment in the United States.
The first step of standard setting is to identify the topic. Topics for consideration originate from various issues arising from the presentation of accounting information and changes in business operations. There are several business trends with significant influence in the environment of business economics. These trends include the growth of multinational businesses and conglomerate enterprises, high risk of market volatility and increased pressure on executives in business organizations to deliver better results (Zeff, 2005). These trends are major originators of new topics on accounting standards in order to accommodate the new business ways of operations.
Some significant events in the business environment contribute to the topic for consideration. The major events include large-scale fraud or fall of a large organization because of poor accounting decisions. Also, political lobbying contributes to the topic of accounting standards to regulate on how information is presented to the public. Political lobbying is associated with misrepresentation of facts to favor a certain view, and accounting standards may be introduced to promote effectiveness in public policy (Zeff, 2005). The second step is to conduct Pre-agenda Research, and this involves gathering more information to establish if the issue requires more attention (Financial Accounting Foundation, 2016). This stage identifies a significant issue that requires the attention of accounting professionals and other stakeholders. The third stage is to make agenda decisions about a topic. This is to formally recognize the issue and start the process of finding the best solution. The fourth, fifth and sixth stages are to deliberate at public meetings, issue document for public comment and host public hearings, respectively (Financial Accounting Foundation, 2016). The purpose of these stages is to bring the issue to public attention and gather more information from the stakeholders. The public is informed about the problem and its impacts on accounting. FASB then creates structures to facilitate the collection of public comments about the issue. Several projects can be launched to gather information about various alternatives in solving the accounting issue. After the sixth stage, the topic is now ready for advanced decisions by the board members at FASB.
The seventh stage is re-deliberation on the issue based on public comments and results from research (Financial Accounting Foundation, 2016). This stage is basically concerned with choosing the most effective alternative to solving the problem. The FASB may decide to issue a new standard, revise existing standards or make clarifications on the application of existing standards (Zeff, 2005). This stage is important in ensuring public participation in the development of accounting standards. It ensures the standards accommodate the interests of various stakeholders on accounting procedures and presentation of information. The eighth stage is the final issuing of a standard (Financial Accounting Foundation, 2016). This is the final decision made by the FASB about the accounting issue and is meant to guide the accounting professionals in their future practice. The final issue creates certain changes so as to accommodate emerging trends or solve existing gaps in regulations. The ninth stage is education, and this occurs before the start of implementation (Financial Accounting Foundation, 2016). FASB provides for a certain period before the start of implementation to allow for public education on the changes. Public education is important to allow the accounting professionals familiarize themselves with the new expectations and to inform the general public about the expected future conduct of business organizations. Also, this stage allows FASB to make clarifications about the application of standards, and this is important because of the highly litigious business environment in the US (Zeff, 2005). There are many calls for clarification of accounting standards because of the high risk of litigation against a business for failure to follow the standards. The last stage is the implementation of new standards in accounting practices. FASB’s accounting standards are implemented through the United States Securities and Exchange Commission (SEC) (FASB, n.d.). The SEC is involved in regulating publicly traded companies in the US and recognizes FASB as the formal standard setter for public companies. The relationship between FASB and SEC creates a strong framework for the recognition and implementation of new accounting standards. Additionally, all the public institutions are expected to follow the best practices on accounting by adhering to accounting standards by FASB.
The process of rulemaking is designed to ensure FASB remains independent and that it can respond to the needs of all stakeholders (FASB, n.d.). There are conflicting interests in the process of making standards because of different costs and benefits to stakeholders. The process is done in a transparent manner that allows the participation of investors, professionals, interest groups and others interested in accounting practices and financial reporting procedures. The process is also dynamic to ensure continuous review of standards to include best practices. New topics for consideration are based on ongoing discussions and comments about businesses. These topics can come in many forms including recommendations by professionals and complaints by the public.
Thus, the development of standards starts with the ongoing issues in the business environment. FASB depends on comments, recommendations, and observations on business issues. The major sources of the topic for FASB’s standards include changes in business operations and significant unexpected events in the business environment because of accounting flaws. FASB has designed the process of standard setting to ensure independence and inclusion of diverse views.
- FASB. (n.d.). About the FASB. Retrieved from http://www.fasb.org/facts/
- Financial Accounting Foundation. (2016). What We Do: FASB. Retrieved from http://www.accountingfoundation.org/jsp/Foundation/Page/FAFSectionPage&cid=1351027541293
- Zeff, S. (2005). Evolution of US generally accepted accounting principles (GAAP). Deloitte IASPlus. Retrieved from https://www.iasplus.com/en/binary/resource/0407zeffusgaap.pdf