Established in 1973, the Financial Accounting Standards Board is a private body responsible for establishing, publishing and updating the financial accounting standards for preparing financial reports in nongovernmental entities, including privately held businesses. FASB articulates the fundamental accounting policies that form the basis of the generally accepted accounting principles, or GAAP. The U.S. Securities and Exchange Commission is a federal statutory institution responsible for monitoring and regulating capital markets. It implements FASB’s policy recommendations with particular regard to publicly traded companies.

Advantages

The complementary policy formulation and implementation functions of FASB and SEC significantly enhance information processing, financial reporting, collaboration and oversight in financial markets. These functions offer numerous advantages to businesses, investors and all other stakeholders.

Financial Reporting

FASB and SEC promote transparent, accurate and timely dissemination of financial reports. FASB’s and SEC’s full disclosure requirements protect investors from misrepresentation of financial information. The full disclosure accounting principle requires companies to make truthful revelations of all the material facts concerning operating results and financial position. This enables users of financial information, such as investors, creditors and lenders, to make knowledgeable and reliable decisions. Moreover, FASB is determined to converge the international accounting standards, which it feels would enable U.S.-based international businesses to achieve cost reductions in financial reporting processes.

Collaboration

The accounting provisions of FASB and SEC represent industrywide expectations because they are products of collaborative stakeholder efforts. Indeed, FASB and SEC always prioritize stakeholder participation in the formulation and implementation of accounting policies for private sector business organizations. This ensures the views of all concerned parties, including business entities, accounting institutions and investors, are incorporated when establishing or reviewing accounting standards.

Oversight

The SEC exercises oversight roles and provides the infrastructure for enforcing FASB’s accounting standards. These oversight roles stretch across all players in the financial markets, including listed companies, stock market brokers and money market funds. This ensures financial market players stick to the rules or risk legal actions for malpractices such as financial fraud and insider trading.

Disadvantages

FASB and SEC provisions lead to understatement and overstatement of some information in financial statements. For example, some of the FASB-fronted accounting provisions are conservative in that they require sales, profits and assets to be posted in values that are way below the alternative approaches they are required to eliminate. This effectively understates the values of revenues and assets as a whole. An example is the treatment of intangible assets in the pooling-of-interests and purchase methods accounting for acquisitions.

Intangible Assets

FASB eliminated the pooling method and replaced it with the purchase method because the underlying criteria that defined its use did not meet the desired financial reporting standards. The pooling method only recognized the intangible assets the acquired entity had recorded. The purchase method was meant to correct this anomaly by recognizing and amortizing goodwill and other intangible assets of the acquired entity at the time of acquisition. The amortization of expenses reduces the reported earnings of the business. This example shows that FASB’s purchase method pushes earnings down compared to the pooling method that was eliminated.