Legal Definitions - Financial Accounting Standards Board

The Financial Accounting Standards Board (FASB) is an independent, non-governmental organization in the United States responsible for establishing and improving the generally accepted accounting principles (GAAP). Its primary role is to ensure that financial reporting is transparent, consistent, and comparable across different companies, allowing investors, creditors, and other stakeholders to make well-informed economic decisions.

• Example 1: Accounting for New Business Models

  Imagine a new technology company that offers its software through a subscription model, where customers pay a monthly fee for access rather than purchasing a one-time license. As this business model became prevalent, the FASB issued specific guidance to clarify how companies should recognize revenue from these recurring subscription services. This ensures that all companies using similar models report their income consistently, providing a clear and comparable view of their financial performance.

  This illustrates FASB's role in establishing and interpreting standards for emerging business models, ensuring that financial statements accurately reflect new economic realities.

• Example 2: Enhancing Transparency in Lease Accounting

  Historically, many large corporations leased significant assets, such as office buildings or heavy machinery, but these lease obligations were often not fully reflected on the company's balance sheet. This made it difficult for investors to understand a company's true financial commitments. To address this, the FASB introduced a major new standard (ASC 842, Leases) requiring companies to recognize most leases on their balance sheets. This change aimed to provide a more complete and transparent picture of a company's assets and liabilities.

  This demonstrates FASB's commitment to improving existing standards to enhance transparency and provide a more accurate representation of a company's financial position for investors and creditors.

• Example 3: Guiding Public Company Financial Reporting

  When a publicly traded manufacturing company prepares its annual financial statements for its shareholders and the Securities and Exchange Commission (SEC), its accountants must meticulously follow the accounting rules and guidelines set forth by the FASB (GAAP). These rules dictate how the company records transactions, values assets, accounts for expenses, and presents financial information in its income statement, balance sheet, and cash flow statement. Adherence to these standards ensures the statements are credible, comparable, and understandable to the public.

  This highlights how FASB's standards are the foundational rules that companies must adhere to for their financial reporting, ensuring that their statements are credible, comparable, and understandable to the public.