The Standard Setting Process
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The Standard Setting Process
There are two main bodies responsible for setting financial accounting standards of nongovernmental entities known as Generally Accepted Accounting Principles (GAAP) in the United States. These bodies are the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB). The federal government created the Securities and Exchange Commission (SEC) in 1934 as a result of the 1929 stock market crash and subsequent great depression. The SEC overseas publicly traded companies by administering the Securities Exchange Act of 1934 and is responsible for the accounting practices and standards of companies under its jurisdiction. When the SEC was created there was no group, board, or body issuing accounting standards in the United States. At the SECs urging, the American Institute of Certified Public Accountants (AICPA) created the Committee on Accounting Procedure (CAP) and subsequently the Accounting Principles Board (APB) to develop private sector accounting standards. In 1973 the APB was dissolved and the Financial Accounting Standards Board (FASB) was created, which the SEC has supported by officially recognizing that standards set by the FASB as being authoritative.
Since its inception, the FASBs mission has been to establish and improve private sector standards of financial accounting. According to “Facts About FASB” (2011), “Since 1973, FASB has been the designated organization in the private sector for establishing standards of financial accounting that govern the preparation of financial reports by nongovernmental entities” (para. 1). The process through which a standard is set is a seven-step process as established by the FASBs Rules of Procedure. These steps are:
The FASB identifies a financial reporting issue based on outside requests or recommendations.
After consulting with FASB Members, the FASB Chair decides if a project should be added to the technical agenda.
Various reporting issues are identified, analyzed, and deliberated by the Board at one or more public meeting.
An Exposure Draft is issued by the Board to solicit outside input.
A public roundtable meeting is held by the Board in regard to the Exposure Draft if it is deemed necessary.
Information obtained through the due process activities such as comment letters and public roundtable discussion is analyzed by the FASB staff, which leads to a re-deliberation by the Board of the proposed provision at one or more public meetings.
An Accounting Standards Update is issued by the FASB, which describes the amendments to the Accounting Standards Codification.
Through this seven-step process, the FASB can accomplish its mission through an independent yet comprehensive process that encourages both Board and public participation.
Authoritative Sources of Accounting Information
The FASB Accounting Standards Codification (Codification) was a five-year project initiated to improve the usefulness of GAAP and had three primary goals. The first goal was to simplify user access to authoritative GAAP by codifying it in one spot. The second was to ensure that as of July 1, 2009 this codified content accurately represented GAAP, and the third goal was to create a research system for this codified content that was up to date. Prior to this project, the FASB had established a Hierarchy of Generally Accepted Accounting Principles that had four categories