In his 4th installment, Ron Bauers gives a brief history of accounting standards and introduces FASB, the Financial Accounting Standards Board. He then presents the ten elements of financial accounting.
Historically, several organizations have been established to develop generally-accepted accounting principles (GAAP). In 1939 at the request of the Securities and Exchange Commission (SEC), the American Institute of Certified Public Accountants (AICPA) created the Committee on Accounting Procedure (CAP), which was composed of practicing CPAs. This body developed standards through a problem-by-problem methodology and without any conceptual framework. In 1959 CAP was replaced by the Accounting Principles Board (APB), which was composed not only of CPAs but also representatives from the private sector and academia. The APB attempted to establish a conceptual framework to promote a structured standards approach. However APB failed as a result of low productivity, controversial accounting issues, and the failure to correct ongoing accounting scandals. In 1971 the Wheat Committee was commissioned to fix the APB, but instead recommended a new body that became the Financial Accounting Standards Board (FASB) in 1973.
Specifically, FASB is the third part of the Financial Accounting Foundation, which has as its mission to establish and improve financial accounting standards and reporting, and to guide and educate the public, users, issuers and auditors. All interested parties are required to provide a due process for the establishment of GAAP, and must respect all perspectives and viewpoints of the other interested parties.
There are several important differences between the APB and FASB to help achieve its objectives. FASB has a smaller but full-time compensated membership, and greater autonomy from other organizations. FASB members must sever all relationships with previous employers, and membership in FASB is not dependent upon being a CPA but may include anyone.
An important part of the work of FASB is to create a framework for developing accounting standards – this is established through the Statements of Financial Accounting Concepts. In a previous installment I discussed the SFAC No. 4 on Objectives of Financial Reporting by Nonbusiness Organizations. In this installment I discuss SFAC No. 6 Elements of Financial Statements (1985), which replaces SFAC No. 3 to include not-for-profit-organizations.
The elements of financial statements are defined to establish a strong theoretical structure that maintains consistency throughout the development of GAAP. There are ten basic but interrelated elements of financial accounting that are defined in SFAC No. 6. Key terms are highlighted in bold italics.
The first three elements – assets, liabilities, and equity – describe resources and claims on resources for a moment in time. The remaining seven elements describe transactions, events, and circumstances that affect an entity during a period of time. The first three elements are changed cumulatively by the remaining seven elements through the interaction called “articulation.”
Until the next installment, here are three things that you can do for yourself: