The most widely used set of accounting principles is referred to as generally accepted accounting principles (GAAP). GAAP is currently set by the Financial Accounting Standards Board (FASB). The FASB is a private organization located in Norwalk, Connecticut. The board is comprised of seven voting members who are supported by a large staff. As of June 1, 1998, the FASB issued 132 Statements of Financial Accounting Standards (SFASs). These standards are the primary source of GAAP.
The Financial Accounting Standards Board (FASB)’s predecessor was the Accounting Principles Board (APB). The APB issued 31 Opinions, which are still part of GAAP, unless they have been superseded by an SFAS.
The FASB faces a difficult task in setting GAAP. Financial accounting is not a natural science; no fundamental accounting laws have been proven to be correct. Accounting exists to provide information useful for decision making. The FASB’s responsibility is to specify the accounting principles that will result in highly useful information. However, given that financial statement users are rather diverse, this is not a simple task. The FASB employs an elaborate due process procedure prior to the issuance of an SFAS. . This process is designed to ensure that all those who wish to participate in the setting of accounting standards have an opportunity to do so.
The Financial Accounting Standards Board (FASB) publishes several preliminary documents during its deliberations on each SFAS. The documents include an Invitation to Comment or a Discussion Memorandum that identify the fundamental accounting issues to be addressed. An Exposure Draft is the FASB’s initial attempt at resolving such issues. These documents are widely disseminated, and interested parties are invited to communicate with the board, both in writing and by making presentations at public hearings. An affirmative vote of five of the seven FASB members is needed to issue a new SFAS.
An interesting aspect of generally accepted accounting principles (GAAP) is that more than one accounting method (or principle) is acceptable for some transactions. For example, there are several acceptable inventory accounting methods. This provides managers with considerable discretion in preparing their financial statements.
Several accountants, judges, and legislators have criticized this situation. They believe that only a single method should be allowed for a given transaction. In general, the Financial Accounting Standards Board (FASB) is attempting to narrow the availability of multiple acceptable accounting procedures.
- Generally Accepted Accounting Principles (GAAP)
- The Securities and Exchange Commission (SEC)