FASB Assignment, Research Paper Example

Executive Summary

The present report concerns the overview of the role that FASB plays in the modern system of US accounting and financial reporting. FASB is a powerful authoritative body in the USA that possesses a standard-setting responsibility in the field of financial reporting. The distribution of finance is of key significance for the functioning of the whole economic system of the US, so the role of FASB as well as the direction of its modern activities has to be thoroughly viewed.

The impact of FASB on public corporations, especially in the view of the FAS 168 introduction, is considered in a detailed way with the analysis of all relevant changes in financial reporting that they have to show this year already. It goes without saying that public corporations are facing a great challenge with multiple changes in the financial reporting schemes, with the application of conservative reporting principles that affect the whole image of the company’s profitability in an extremely negative way, aggravating the shrinking figures resulting from the recession.

In addition, FAS 168 enacted by FASB plays a significant role in the increase of transparency of financial reporting and revelation of decency or misuse of funds by the company’s management. The implementation of FAS 168 dictates much change, detection of pitfalls and requires professional help of certified accountants who may help go through the transition period. The same need of change concerns our accounting company as well: as professionals in the field, we will be directly involved in accounting according to new standards, and as a public company we will have to produce our own accounting in full correspondence with FAS 168. Thus, detailed information about FASB provisions acquires essential importance for the whole staff.

Introduction

The Financial Accounting Standards Board (FASB) is a federal organization that exists since 1973; it has been created to establish, update and review standards for financial accounting and reporting in the USA and to monitor compliance with the US GAAP. The standards that FASB creates and maintains ease the work on financial reports preparation and consolidation, external auditing etc.; the issues of compliance of standards are highly important in understanding financial information because they carry the major load of information influencing allocation of financial resources, investment and other finance-related operations in the country (FASB Financial Accounting Standards Board, 2010). Its mission is to establish and improve standards for financial accounting, report for guidance, education of public etc. (FASB Financial Accounting Standards Board, 2010).

FASB actually consists of the 16-member Board of trustees that chooses the FASB staff of 7 members (they are usually selected from the professional CPA community) (Sprinkle, 2010). The procedure of establishing these standards has been developed to ensure provision of all relevant information for Board members and issuance of corresponding accounting regulations. Thus, ­the FASB/GASB receives requests/recommendations for possible projects and reconsideration of existing standards from various sources, conducts the following research and consults with the Board members, with further action taken by the Board alone with involvement of public meetings, discussions and reviews (Financial Accounting Foundation 2009 Report, 2010).

During the whole period of its existence, FASB has been taking care of accuracy, transparency and adequacy of financial reporting and accounting, which is the major guarantee of the economic system’s normal functioning. There have been some changes in FASB standardization code that affect all spheres of business, including public corporations as well. We as a publicly held accounting firm have to comply with these changes for two reasons: first of all, because we are also a public company and we have to know how to conduct accounting and reporting activities in the new way, and secondly, because our profession is accounting and financial reporting. As CPAs, we have to know the new standards to be able to conduct our professional activity on auditing, accounting and reporting the financial activities of other companies as well. For this purpose the present report has been complied: it provides relevant information on the history of FASB, its impact on public corporations, relationships of public corporations with their investors, customers and employees. The first part of the report summarizes appropriate data on FASB and the second part contains recommendations for management, conclusions and implications for further research and attention.

Body of Report

History. The appearance of FASB was a long-lasting process initiated long before the first incentives for the institutional securitization of financial accounting standards appeared:

The impetus for the Financial Accounting Standards Board dates back to the economic boom of the 1920s, the stock market crash of 1929, and the Great Depression that followed. By the mid-1930s, both the financial community and the federal government had responded to the obvious need for uniform accounting standards, particularly for the   financial statements   of publicly traded corporations (Sprinkle, 2010).

As a result of the Stock Exchange and the American Institute of Certified Public Accountants (AICPA) joint effort the Audits of Corporate Accounts were published in 1934, initiating the beginning of the standardization process. However, the functions of the AICPA overlapped with the functions of the U.S. Securities and Exchange Commission (SEC) that also had the right to prescribe standards for financial reporting (Sprinkle, 2010). IACPA undertook the financial reporting standardization responsibilities in 1938, FASB became the sole standardization body in 1973 upon the ratification of SEC (Sprinkle, 2010). Nowadays, in addition to the standardization and monitoring functions of FASB, the institution is continuously undertaking persistent attempts aimed at harmonization and convergence of FASB standards with the international accounting standards accepted worldwide (International Convergence of Accounting Standards—A Brief History, 2010).

Impact of FASB on public corporations. Public corporations are perceived as a particular focus of FASB because of a different set of standards posed for the public sector in contrast to governmental agencies or the private sector ventures. The main reason for this is that public companies have to be accountable to investors and stakeholders – they are actually owned by the public that has the right to know all directions of their costs’ allocation. For this reason there is a specific procedure of auditing public companies by FASB:

For public-sector accounting, the FASB and the FASAC are complemented within the FAF by the Governmental Accounting Standards Board (GASB) and the Government Accounting Standards Advisory Council (GASAC). Pronouncements by various government agencies (particularly the SEC) and professional bodies (particularly the AICPA’s Accounting Standards Division) also supplement the work of the Financial Accounting Standards Board (Sprinkle, 2010).

At the present moment public companies are directly affected by the FASB activities because of much innovation introduced by the FAS 168 – a new set of accounting and financial reporting standards. The first change is as follows: “all references in public company financial statements and related footnotes will be to the classification system set forth in the FASB Codification, rather than to the applicable previously existing literature” (Impact of FASB’s Accounting Standards Codification on Filings by U.S. Public Companies, 2009). For the sake of conformity certain changes have to be made with disclosure documents as well – they are awaited in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, i.e. the analysis of accounting policies that is usually contained in the discussion. This section of public companies’ reports “often includes references to particular FASB statements or APB opinions. Such references will generally need to be revised when companies become subject to the Codification” (Molepske & Weber, 2009). All public companies have to take urgent action and consult professional external auditors to check their reports for inconsistency and correct it before publishing the report (Molepske & Weber, 2009).

FAS 168 has changed the overall way CPAs view, research and evaluate application of GAAP – too many changes in authoritative standards have been made to underestimate the FASB impact on public corporations nowadays (McPartlan, 2009). As compared to FAS 162 that reaffirmed the responsibility for financial statement preparation lying on the internal management staff but not the external auditors, FAS 168 has simplified the GAAP hierarchy – now all accounting treatments that are not in the Codification are not authoritative anymore, so the financial reporting work has to be reconsidered substantially (McPartlan, 2009).

So much change inevitably causes the natural reaction from all stakeholders involved in the process of public companies’ functioning. Their opinions and attitudes have to be reviewed carefully as well before the grounded opinion about the FASB impact on public corporations can be adequately assessed.

Impact of FASB on the company’s reputation, investors, customers and employees. Robert Herz, the Chairman of FASB, has recently voiced a very positive forecast for the impact of innovated FASB standards on the financial accounting and reporting processes:

“These changes were proposed and considered to improve existing standards and to address concerns about companies who were stretching the use of off-balance sheet entities to the detriment of investors…They’ll provide better transparency for investors about a company’s activities and risks in these areas” (Norwalk, 2009).

Despite such optimism about the increased companies’ integrity in accounting and reporting and projected growing investor satisfaction, the practical consequences of the new Codification implementation prove the opposite: CitiGroup, Inc. and JPMorgan Chase & Co. report worsening of their position in the viewpoint of investors: the companies lost sales treatment for certain assets because of the new rules established by FASB.

“U.S. regulators said the 19 lenders subjected to stress tests completed this month would have to bring about $900 billion of assets onto their balance sheets because of the FASB changes, according to a Federal Reserve report released April 24” (Katz, 2009).

This dreadful necessity rises from the conservative accounting principle introduced by FASB; it dictates to “peg revenues, earnings, and assets at a lower value” with the converse treatment of losses reported at higher value than they actually are (Sprinkle, 2010). This practice is designed to secure the investors’ and customers’ positions due to their preparation to risk-taking and possession of more precise information than the conventionally overstated cash flow statement provides. However, it causes threat for lending, as in case with JPMorgan that suffered losses equaling “$70 billion of credit card receivables, $40 billion of assets related to so- called conduits and $50 billion of other loans, including residential mortgages” (Katz, 2009). Obviously, it is a temporary measure that will be taken into account in further financial accounts to avoid such underestimation of cash flows, but at the present moment the impact is still seriously negative.

The principle of revenue recognition that has been discussed in the Memorandum of Understanding and further incorporated in the FASB current policy of Codification introduces many benefits for both employees and customers of public companies (FASB and IASB Reaffirm Commitment to Memorandum of Understanding, 2009):

“developing a single revenue recognition model built on the principle that an entity should recognize revenue when it satisfies its performance obligations in a contract by transferring goods and services to a customer…clarifying that principle and applying it consistently to all contracts with customers will improve the comparability and understandability of revenue for users of financial statements” (FASB and IASB Reaffirm Commitment to Memorandum of Understanding, 2009).

The principle of share-based payment outlined in the same document is called to improve the relationships of public companies with their employees – FASB has initiated issuing standards for accounting for share-based payment arrangements with employees. Under this standard, all entities have to recognize an expense for all employee services received in share-based payment transactions, using a fair-value-based method and compensation cost has to relate to share-based payment transactions be recognized in financial statements (FASB and IASB Reaffirm Commitment to Memorandum of Understanding, 2009). This innovative standard opens new doors to accounting and transparency for investors and may really change the scheme of relationships between investors, employees and the company’s management staff in an unexpected way.

Recommendations to management. Under the innovative provisions of FASB and new rules of financial reporting and accounting it is necessary to ensure compliance with the standards as fully and precisely as possible. The issue of data transparency, integrity towards investors and employees is at stake, which is extremely important for the reputation of the company. For this reason it is of vital importance to ensure a timely revision of the latest reports and detect sections that need a revision under FAS 168. The sections that carry strategic importance such as the share-based payment method and revenue recognition need to be considered first of all. In case some employees receive beneficial but unreported benefits from the public company’s management, it is necessary to stop these practices as unethical and indecent towards investors and shareholders.

In addition, the tendency to overestimate weaknesses and underestimate strengths may bring a great stress on the company’s reliability and reputation. There is an urgent necessity to provide the stakeholders with all objective information on the temporary character of such underestimated financial status of the company, explaining the nature of the discrepancy in plain, understandable words. Such measures will enable the company to retain customers, employees, investors, at the same time saving its reputation. The necessity of additional training concerning the new provisions of FASB stands to reason: as an accounting firm, our company will enjoy a much demand for services in the near future since the responsibility for accounting has been shifted to outside auditors. So we need to be ready for the increased workload under the new standards, being proficient in which is our urgent priority.

Conclusion

As it becomes clear from the whole realm of information reviewed in the previous sections, every participant of the business field (be it a stakeholder, an owner or an employee) has to be kept informed about the changes in financial reporting and accounting that take place in the USA and are conducted by FASB. FASB as a body of standardization of financial activities and monitoring of compliance with them strives to the provision of improved, more precise and more transparent information to all stakeholders. However, the changes that it implements in procedures of accounting and financial reporting may cause temporary challenges for public companies and even threaten their reputation in the market.

The main challenge that every public company has to overcome at the present period of time is justifying the understatement of profits to the investors and stakeholders. Secondly, each firm has to put up with the fact that the accountability of all companies is inevitably rising, so there will be no more chance to misuse the company’s resources or to grant unreported privileges to employees without reporting about this to the investors. FAS 168 is a great step forward from the point of view of investor and customer satisfaction – due to these standards the public will receive a much more grounded and adequate assessment of the economic situation in the country. Nonetheless, the new system requires much change that needs to be undertaken by both accountants and company management.

Our company will gain many benefits from the implementation of the pronounced recommendations in its daily practice. First of all, we are an accounting company and we need to keep pace with the changes in the FASB standards as they are the main guidance according to which we operate. Secondly, the reputation of our company is highly important because of the fierce competition in the accounting market. In case we are able to sustain the positive image of a decent, accountable company, we will be able to keep our clients and attract new investors and customers that will refuse from cooperating with indecent companies. Thus, in case we arrange our activities in compliance with innovative FASB standards, this compliance will ensure a firm niche in the market and increased demand for our services, which is of strategic importance for the firm.

References

FASB and IASB Reaffirm Commitment to Memorandum of Understanding (2009). International Accounting Standards Board. Retrieved June 8, 2010, from http://www.iasb.org/NR/rdonlyres/0AE63429-BCF3-461A-8B5D-3948732C DDC2/0/JointCommunique_October2009FINAL4.pdf

FASB US GAAP Financial Accounting Standards Board (2010). Value Based Management. Retrieved June 8, 2010, from http://www.valuebasedmana gement.net/organizations_fasb.html

Financial Accounting Foundation 2009 Report (2010). Financial Accounting Standards Board. Retrieved June 8, 2010, from http://www.fasb.org/cs/Blob Server?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820588436&blobheader=application%2Fpdf

Financial Accounting Standards Board (FASB). Encyclopedia of Business (2^nd ed.). Retrieved June 8, 2010, from http://www.referenceforbusiness.com/encyclo pedia/Fa-For/Financial-Accounting-Standards-Board-FASB.html

Hermsen, M. (2009). Impact of FASB’s Accounting Standards Codification on Filings by U.S. Public Companies. Mayer Brown LLP. Retrieved June 8, 2010, from http://www.thefreelibrary.com/Impact+of+FASB%27s+Accounting+Standards+Codification+on+Filings+by+U.S.+…-a0207416151

International Convergence of Accounting Standards—A Brief History (2010). Financial Accounting Standards Board. Retrieved June 8, 2010, from http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1176156304264

Katz, I. (2009). FASB Rule Will Force Banks to Move Assets onto Books. Bloomberg. Retrieved June 8, 2010, from http://www.bloomberg.com/apps/ news?pid=20601087&sid=aF7xhCfMRWAI

McPartlan, J.M. (2009). FAS 168: Moving On Up. CalCPA Education Foundation. Retrieved June 8, 2010, from http://www.calcpa.org/Content/25577.aspx

Molepske, N.M., and G.S. Weber. (2009). FASB Accounting Standards Codification Will Have an Impact on SEC Reports. Faegre Benson Official Site. Retrieved June 8, 2010, from http://www.faegre.com/showarticle.aspx?Show=10098

Norwalk, C.T. (2009). FASB Issues Statements 166 and 167 Pertaining to Securitizations and Special Purpose Entities. Financial Accounting Standards Board. Retrieved June 8, 2010, from http://www.fasb.org/cs/ContentServer?c= FASBContent_C&pagename=FASB/FASBContent_C/NewsPage&cid=1176156240834