Fasb And Its Role In Accounting Practices

In 1929, the crash of the United States market led to the economic depression known as the "Great Depression." Steps were taken to ensure that this sort of domino effect never happens again. Several regulatory bodies were created, including the Securities and Exchange Commission (SEC) that enforces the Generally Accepted Accounting Principles (GAAP) and other laws, the Financial Accounting Standards Board (FASB) which creates these laws and rules, and the Government Accounting Standards Board (GASB) which ensures that the government is following suit as well.

These accounting environments seem to be working well; however, a new factor is entering the mix. Our world is becoming smaller as technological advances in communication become faster and better. Companies in the United States are going global. The world will be dealing with currency issues, language barriers, and standard issues and needs to work together to create accounting harmonization.

The Regulatory Environment

Several regulatory agencies govern how the accounting principles are applied in businesses throughout the United States. The FASB is one of the agencies that regulate accounting practices in the United States and primarily sets standards. The FASB states there are four characteristics that make up the accounting principles; they are relevance, reliability, comparability, and consistency. Their mission statement is "to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information."

"To accomplish its mission, the FASB acts to:

1) Improve the usefulness of financial reporting by focusing on the primary characteristics of relevance and reliability and on the qualities of comparability and consistency;

2) Keep standards current to reflect changes in methods of doing business and changes in the economic environment;

3) Consider promptly any significant areas of deficiency in financial reporting that might be improved through the standard-setting process;

4) Promote the international convergence of accounting standards concurrent with improving the quality of financial reporting; and

5) Improve the common understanding of the nature and purposes of information contained in financial reports." (facts about FASB www.fasb.org)

Members of the FASB are appointed by the Financial Accounting Foundation (FAF) and serve for a five-year term and may be re-appointed for one more five-year term. There are seven members on the board with diverse backgrounds; however, each member is required to have "knowledge of accounting, finance, and business, and a concern for the public interest in matters of financial accounting and reporting." (facts about FASB www.fasb.org) These seven members must cut ties with their current firms and any institutions they may be working for while on the board. In addition to the board members are approximately 68 other professionals from many different venues who work directly with the board, including support staff.

The FASB is under the direction of the SEC. "The mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets and facilitate capital" (SEC.org). The SEC enacted the Securities Act of 1933, stating that investors would receive any information about securities currently for sale and it prohibits deceit, misrepresentation, and fraud associated with the sales of securities. Another regulatory agency is the GASB. The GASB establishes and improves the accounting standards of state and local government accounting and state laws enforce compliance. The standards established by these regulatory agencies form GAAP, a work in progress that continues to evolve.

Issues with Foreign Currency

When international companies conduct business together, there are issues that arise with foreign currency when completing transactions. Both companies will need to translate from one currency to the other. If it is a cash transaction, currency exchange is done in that moment.

A credit transaction is the more difficult transaction to complete when there is an issue with foreign currency. At the time of the initial transaction, the current exchange rate is the equivalent value of the liability or asset, and accounting for those transactions is done on the balance sheet. Settling the account is done like any other transaction on the balance sheet.

Resolving the issue is equitable and equal when conversion of currency is done at the time of transaction, or in the event of a credit transaction, at the time of recording. By presenting the liability and asset equally and at a fair value, the income statement tracks the difference.

Differences in GAAP

When discussing the GAAP, there two forms to talk about. The first is US GAAP that are created by FASB and the second is the IASB, or Global GAAP. As companies continue to grow and broaden their horizons, it is becoming necessary to incorporate these two types of accounting standards. FASB and the IASB have several differences. According to A. Pieniazek (2009), US GAAP bases rules and specific details and IASB bases rules on principles. US GAAP enforces rules that require a company to share its annual financial reports with external users, and the (SEC) enforces compliance. In addition they must also have internal audits that verify the information on the annual reports to be accurate and free of error. U.S. GAAP follows rules put into place with the Sarbanes-Oxley (SOX) act of 2002, after the U.S. became victim to several companies giving misleading financial reports and bankrupting many of its internal and external users. Currently, efforts are being made to bring accounting standards from the FASB and the ISAB together in what is known as global GAAP so information from all companies is universal and holds no national limitations.

Global Language of Business