As new FASB accounting standards are continuously introduced, it can be difficult to figure out which ones are most relevant for your business. You may also be unfamiliar with FASB accounting rules or lack experience with generally accepted accounting principles.
If you’re feeling unsure about any of these topics, you’ve come to the right place. In this blog, we’ll provide an overview of the FASB, GAAP, and ASC 842 to help you understand the significance of these vital accounting concepts.
The Financial Accounting Standards Board (FASB)
Formed in 1973, the Financial Accounting Standards Board (FASB) is an independent organization that establishes accounting and financial reporting standards for U.S. businesses and nonprofits. These standards must follow generally accepted accounting principles (GAAP), which are also issued by the Board. The FASB is recognized by the Securities & Exchange Commission (SEC) as the official accounting standard-setter for all public companies.
The Financial Accounting Standards Board is a member of a larger group of independent accounting organizations that also includes the:
- Financial Accounting Standards Advisory Council (FASAC), which advises the FASB on projects related to their agenda, procedural matters, and possible new agenda items.
- Governmental Accounting Standards Board (GASB), which sets accounting and financial reporting standards for state and local governments across the country.
- Governmental Accounting Standards Advisory Council (GASAC), which consults with the GASB on technical issues, project priorities, and the organization of task forces.
As a collective, these nonprofit organizations are focused on improving accounting and reporting standards to produce the most useful information for investors. They’re also dedicated to teaching stakeholders how to fully comprehend and implement standards as effectively as possible.
FASB Accounting Standards Codification® (ASC)
The FASB created the Accounting Standards Codification® (ASC) in 2009 to simplify access and provide relevant SEC guidance alongside GAAP pronouncements. The ASC groups the 800+ FASB standards by topic to reduce the amount of time and effort needed to research an issue. It also makes FASB accounting standards more accessible and usable when mitigating non-compliance risks.
FASB Accounting Standards Codification® Topics
The Codification can be broken down into six primary FASB accounting concepts (or topics):
- General Principles Area. Explains broad, conceptual accounting topics.
- Presentation Area. Explains how information should be presented in financial statements.
- Assets, Liabilities, & Equity Areas. Guidance on specific individual balance sheet accounts.
- Revenue & Expenses Areas. Guidance on specific individual income statement accounts.
- Broad Transactions Area. Guidance on multiple financial statement accounts.
- Industry Areas. Guidance on specific industries or types of activity.
How the FASB Sets New Standards & Updates Existing Ones
The seven members of the Financial Accounting Standards Board begin by identifying financial reporting issues based on recommendations and requests. After reviewing FASB staff-prepared analysis, they decide whether or not to add a project to their agenda.
Once they’ve settled on an issue, the FASB deliberates it at one or more public meetings. The board then issues an exposure draft to solicit stakeholder input and may hold public roundtable meetings. At the same time, FASB staff analyzes comment letters, roundtable discussion feedback, and any other information gathered through due diligence.
At this point, the FASB redeliberates the proposed provisions at one or more public meetings. Once new FASB accounting standards are approved, the board issues an accounting standards update (ASU) for the ASC.
The Financial Accounting Foundation (FAF)
Any discussion of the Financial Accounting Standards Board must include an explanation of the Financial Accounting Foundation (FAF). This independent, private sector, nonprofit organization is responsible for the oversight, administration, financing, and appointment of the FASB and GASB and their individual advisory councils.
As an independent entity with no stake in specific outcomes, the FAF can make objective decisions when selecting and monitoring financial boards and councils. This allows the FASB and GASB to maintain impartiality, even in markets with fiercely competitive demands and proprietary interests.
Generally Accepted Accounting Principles (GAAP)
Issued by the FASB, generally accepted accounting principles (GAAP) are designed to improve the consistency, clarity, and comparability of financial data. The SEC requires that all publicly traded companies file GAAP-compliant financial statements to remain listed on the major stock exchanges.
Among other subjects, GAAP includes revenue recognition, balance sheet classification, and materiality. Ultimately, these standards make it easier for stakeholders and investors to analyze a company’s financial statements and compare them to other businesses. FASB accounting principles also help maintain trust in the financial markets for lower transaction costs and a healthier economy.
While GAAP compliance isn’t required for private companies, it’s typically viewed favorably by potential lenders. In fact, most creditors require the submission of annual GAAP-compliant statements when issuing business loans. Remember that GAAP cannot ensure that a company’s reporting is completely accurate, so it’s very important to perform due diligence before investing.
FASB Accounting Standards Codification® Topic 842, Leases
Now that we’ve explained the Financial Accounting Standards Board and generally accepted accounting principles, let’s take a look at ASC Topic 842. Released by the FASB in 2016, this update was created to “increase transparency and comparability in financial reporting by requiring balance sheet recognition of leases and note disclosure of certain information about lease arrangements.”
ASC 842 focuses on streamlining lease accounting under GAAP and increasing transparency into liabilities resulting from leasing arrangements, particularly operating leases. This standard applies to any business or organization that enters into a lease and applies to any asset not accounted for under other topics.
What is a Lease?
According to ASC 842, leases are contracts that grant control of an asset for a set period of time in exchange for a monetary payment. To demonstrate control of an asset, businesses must benefit financially from the use of the asset and direct that use throughout the contract period.
Why ASC 842 Matters
The preceding standard (ASC 840) only required businesses to record some leases on their balance sheet. In particular, operating leases were always off-balance sheet transactions, despite the very real liability presented by their repayment obligations.
ASC 842 eliminated off-balance sheet leasing activities, thereby improving financial reporting while improving comparability and transparency. This standard allows stakeholders and investors to fully assess the impact of lease payments on a company’s cash flow. It also gives management better insight into the full extent of their lease obligations, allowing them to make more informed decisions.
What’s Included in ASC 842?
ASC 842 includes a broad overview and individual sections on each of the following transactions:
- Lessee accounting (operating and finance leases)
- Lessor accounting
- Sale-leaseback transactions
- Leveraged lease arrangements
While ASC 842 was introduced in early 2016, the implementation date for all entities has been pushed back several times due to the impact of the COVID-19 pandemic. For public companies, the FASB accounting standard was effective for reporting periods that began after December 15, 2018 and was adopted on January 1, 2019 for calendar-year public companies.
The effective date of this new FASB accounting standard is currently for annual reporting periods beginning after December 15, 2021 for private companies and nonprofit organizations, but this may change over time.