What it means
The FAF was created in the early 1970s, when the US accounting profession moved from standard-setting by committees of practitioners to a full-time independent board. The foundation's job is not to write standards itself but to ensure the right structure, people and funding are in place.
Its trustees come from backgrounds that include auditing, investing, preparing accounts and academia, so that no single group can dominate the process. Its two main standard-setters have distinct roles.
FASB writes US Generally Accepted Accounting Principles (GAAP) for private companies, public companies and not-for-profits. GASB sets accounting and reporting standards for state and local governments.
The foundation also supports advisory groups that bring in views from those who use and prepare financial statements, and it oversees the work on private company reporting, where simpler rules can reduce cost. The aim is to make sure standards are reached through an open process that considers the costs and benefits for everyone affected.
Public consultation is built into each step, and comment letters from companies, investors and auditors are published for anyone to read. Funding is a key part of independence.
Under US law, public companies pay an accounting support fee which helps fund FASB and the foundation's work. This arrangement means standard-setters do not depend on the goodwill of the firms they regulate, though the Securities and Exchange Commission retains authority over accounting standards for public companies.
For a non-specialist, the practical value is predictability. When a company changes how it reports revenue or leases, the change usually traces back to a standard issued by FASB under the foundation's oversight.
Understanding who sits behind the rules helps explain why they change slowly and after much consultation, and it shows where a business can have its say. The foundation also reviews the performance of its boards and the effectiveness of the standard-setting process, and it explains its work to the public.
Trustees meet regularly and consider whether the structure still serves investors, preparers and auditors. This review function is a quiet but important safeguard.
In practice
Real-world examples.
Example
A chief financial officer at a listed manufacturer reads a new FASB update on lease reporting. She traces the process back to the foundation's structure and understands why a long consultation period gave her team time to prepare. Her team uses that time to model the effect on reported profit, debt ratios and the loan covenants the company has agreed with its bank.
Example
A city finance director prepares annual statements under GASB rules. The standards and the board that wrote them come under the same independent oversight as FASB, which gives users confidence in the public accounts. Bond investors who buy the city's debt rely on that consistency when they compare it with other issuers.
Example
A not-for-profit board treasurer submits a comment letter on a proposed standard affecting charities. The open consultation process, supported by the foundation, lets small organisations make their views known to the standard-setter. The treasurer explains in the letter that the proposed disclosures would cost more to prepare than donors would ever read.
Case study
Seen in the real world.
Stonebridge Holdings is an illustrative, fictional listed company whose finance team was surprised by a new reporting standard that changed how it presented a large category of contracts. The controller had not followed the consultation papers and found herself rushing to model the effect on the accounts.
After the experience she assigned a team member to follow standard-setter agendas and to respond to proposals that affected the business. The team also built a short briefing for the audit committee each quarter, covering coming changes and their expected impact.
In this illustrative story the next major standard arrived with no surprises, and the company's comment letter helped shape a transition rule that suited its situation. The controller concluded that following the process was cheaper than reacting after the fact.
Watch out
Common mistakes.
- Believing the FAF writes accounting standards, when that is the job of FASB and GASB, with the foundation providing oversight, appointments and funding.
- Thinking the foundation is a government agency, when it is an independent private-sector organisation.
- Ignoring proposed standards until they are final, when the consultation stage is the chance to influence them and to prepare systems and staff.
Questions
People also ask.
What does the Financial Accounting Foundation do?
It oversees, administers and funds FASB and GASB, appoints their members and protects their independence.
Who regulates public company accounting overall?
The Securities and Exchange Commission has legal authority over public company reporting and recognises FASB as the standard-setter.
Is the FAF involved in international standards?
Not directly; international standards come from a different body, although US and international boards often discuss shared issues and try to reduce unnecessary differences between their rules.
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