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DEVELOPMENT OF ACCOUNTING RULE-MAKING

The Future is Now:  brief discussion on the development of rule-making.

Committee on Cooperation with Stock Exchange (May Committee)- early 1930's
Committee on Accounting Procedure (CAP) 1938-1959
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 issued Accounting Research Bulletins (ARB's)<---Click for Illustration
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 Numbers 1-42 codified into ARB 43 in 1953
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 From 1953-59 additional bulletins issued to bring total to 51
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 Criticized for following a problem-by-problem approach (brush-fire approach)
* Criticized for not developing a theoretical structure of accounting principles
Accounting Principles Board (APB)
Major purposes: 
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 Advance written expression of accounting principles
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 Determine appropriate practices
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 Narrow the areas of difference and inconsistency in practice
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 Need for an overall conceptual framework recognized
* Research Division created to commission research--resulted in the publication of Accounting Research Studies (15 total)<---Click for Illustration
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 APB had more authority and responsibility than the CAP
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 Issued APB Opinions (31 total)<---Click for Illustration
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 Existed from 1959 - 1973
Promulgation of APB Opinions
Wheat Committee
Formal title: Study Group on the Establishment of Accounting Principles
* Appointed in 1971
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 Its recommendations submitted to the AICPA Council in the Spring of 1972
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 Resulted in the demise of the APB and the creation of a new standards-setting structure composed of three organizations:
Financial Accounting Foundation
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 Originally Sixteen trustees
Effective July 1, 2008, changed to a flexible range of 14 to 18 trustees
* Protects the independence of the Board
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 Appoints FASB and FASAC members
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 Raises money for funding FASB  funding changes brought about by Sarbanes-Oxley
Financial Accounting Standards Board
Download (and print) Facts About the FASB

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 Appointed by the FAF
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 Smaller membership (  was 7; changed to 5, now back to 7 members vs. 18 members of the APB)

  ✓  (changed recently to 5 members instead of 7 effective July 1, 2008--see this link)

  ✓  Another opinion concerning the desirability of this change!

  ✓ Financial Accounting Foundation to Increase Size of FASB  (Back to 7)  ( 8/24/2010)
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 Full-time remunerated membership
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 Greater autonomy 
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 Increased independence
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 Broader representation
Financial Accounting Standards Advisory Council
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 Appointed by the FAF
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 Consults with FASB on both major policy and technical issues
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 Helps select task force members

Original Steps in evolution of a typical FASB Statement: (see revised process)
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 Topic or project identified and placed on the Board's Agenda
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 Task Force of experts assembled to define problems, issues and alternatives related to the topic.
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 Research and analysis are conducted by the FASB Technical Staff.
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 A Discussion Memorandum is drafted and released. ( Invitation to Comment may precede or replace a DM)
    update (Discussion Memoranda are no longer issued; Discussion papers and/or Invitations to Comment have replaced DM's)
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 Public Hearing held (sixty days after release of the memorandum)
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 Board analyzes and evaluates the public response.
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 Board prepares an exposure draft for release. 
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 Board evaluates all of the responses.
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 Study of exposure draft--revises draft if necessary.
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 Vote on issuance of Standards Statement.
Originally required 5 of 7 votes for passage; was changed to 4 of 7 votes in the 1970's, changed back to 5 of 7 in 1990, and most recently, changed back to the 4 of 7 requirement in 2002!)   When the membership of the FASB reduced to 5, in 2008, a simple majority voting requirement was retained, wheich meant that 3 of 5 votes was required for passage.  In August, 2010, the membership in the FASB was increased back to 7 members. A simple majority voting requirement was retained.

 (Note:  Under the revised due process [below]) no new standards are now issued. Instead, an Accounting Standards Update is issued, and then incorporated into the Accounting Standards Codification.)

FASB Due Process Steps Required by the Rules of Procedure (Revised)

The FASB has established the following procedures for developing accounting standards. These procedures are used for major agenda projects. Not all of the steps may be necessary for application and implementation projects. Many other steps are followed during the course of the project that are not specifically required by the Board’s Rules of Procedures.

  1. The Board receives requests/recommendations for possible projects and reconsideration of existing standards from various sources.
  2. The FASB Chairman decides whether to add a project to the technical agenda, subject to oversight by the Foundation's Board of Trustees and after appropriate consultation with FASB Members and others.
  3. The Board deliberates the various issues identified and analyzed by the staff at a series of public Board meetings.
  4. The Board issues the Exposure Draft. (In some projects, the staff may prepare and issue an Invitation to Comment or Preliminary Views prior to the Board issuing an Exposure Draft.)
  5. The Board holds a public roundtable meeting on the Exposure Draft, if necessary.
  6. The staff analyzes comment letters, public roundtable discussion, and any other information and the Board redeliberates the proposed provisions at public meetings.
  7. The Board issues an Accounting Standards Update describing amendments to the Accounting Standards Codification.
OTHER FASB PRONOUNCEMENTS
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 Statements of Financial Accounting Concepts
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 FASB Interpretations
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 FASB Technical Bulletins

 
"In 1972, when the Wheat Committee—a study group on the establishment of  accounting principles— originally recommended the formation of  FASB, its report looked forward to standards that would be practical. That concept has been lost somewhere along the way."

--SAMUEL A. DERIEUX,  former AICPA president, Journal of Accountancy · Online Issues · May 2000
 
EMERGING ISSUES TASK FORCE (EITF)
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 Formed in 1984
* consists of no fewer than 10 and no more than 15 members
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 Consists of membership from:
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 CPA firms represented

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 representatives from large firms

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 representatives from small firms
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 representatives from industrial companies
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 observer from the SEC
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 representative from the FASB (Director of Research and Technical Activities)
* operates at the direction of the FASB
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 Purpose:

* The mission of the Emerging Issues Task Force is to assist the Financial Accounting Standards Board in improving financial reporting through the timely identification, discussion, and resolution of financial issues within the framework of existing authoritative literature.
The EITF was designed to minimize the need for the FASB to spend time and effort addressing narrow implementation, application, or other emerging issues that can be analyzed within existing GAAP.

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 identify emerging issues

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  develop consensus statements-
Make-up of the Task Force is designed to include persons in a position to be aware of emerging issues before they become widespread and before divergent practices become entrenched. Therefore, if the group can reach a  consensus on an issue, usually that is taken by the FASB as an indication that no Board action is needed. If the Task Force is unable to reach a consensus, it may be an indication that action by the FASB is necessary.

* A consensus is reached if no more than three of the voting members  object to a proposed position  on an EITF Issue

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 Acts as a "problem filter" for the FASB
SEC has indicated that it will view consensus statements as preferred accounting and will require persuasive justification for departing from them.  The SEC's Chief Accountant has said that he would challenge any accounting that differs from a consensus of the Task Force because the consensus position represents the best thinking on areas for which there are no specific standards.
FASB Accounting Standards Codification (ASC)

* FASB Statement No. 168 is the final standard that will be issued by FASB in that form. It was added to FASB ASC through Accounting Standards Update No. 2009-02 on June 30, 2009. There will no longer be, for example, accounting standards in the form of statements, staff positions, Emerging Issues Task Force (EITF) abstracts, or AICPA Accounting Statements of Position. 

* Instead, FASB will issue Accounting Standards Updates

*
 FASB will not consider Accounting Standards Updates as authoritative in their own right.

* Instead, they will serve only to update FASB ASC, provide background information about the guidance, and provide the basis for conclusions on changes made to FASB ASC.
 Review Questions
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