The Changing Landscape of Accounting Standards Setting
By Pierre L. Titard and Dean W. DiGregorio
Beyond FASB: The Other Standards Setters
FASB may be the best-known accounting standards setter, but newer bodies are becoming increasingly important within the GAAP hierarchy. The relatively unknown Federal Accounting Standards Advisory Board (FASAB) is responsible for setting accounting standards for federal entities. Since the GAO began auditing financial statements from a number of large federal agencies in 1997, the importance of FASAB’s standards has become more apparent. Similarly, as corporations transact more international business, the influence of the International Accounting Standards Board (IASB), which sets cross-border standards, has grown. As FASB and the IASB work toward the convergence of their differing standards, the line between U.S. GAAP and a truly global set of accounting principles will blur. To be prepared, CPAs should become familiar with all major standards setters.
Accounting standards setting has evolved over the past 30 years. In 1972, the Financial Accounting Standards Board (FASB) replaced the Accounting Principles Board (APB) as the primary private organization responsible for establishing accounting principles in conformity with generally accepted accounting principles (GAAP). The Governmental Accounting Standards Board (GASB) was created in 1984 to set standards for state and municipal entities. Then, in 1990, the Federal Accounting Standards Advisory Board (FASAB) was established to set standards for federal government accounting. Two years ago, the body responsible for setting international standards, the International Accounting Standards Committee (IASC), became the International Accounting Standards Board (IASB). The IASB has the responsibility for setting standards that are acceptable in more than one country.
FASAB and GAAP
In October 1999, the AICPA Council recognized the FASAB as the body designated to establish GAAP for federal entities under Rule 203 of the AICPA’s Code of Professional Conduct. Rule 203 effectively states that AICPA members cannot say that the financial data of an entity are in conformity with GAAP if they depart from any principle promulgated by a body designated by Council. There are now three such bodies designated to establish GAAP: FASB, GASB, and FASAB.
Despite its lofty status in the discipline of accounting, FASAB has an identity problem. Although FASAB has been around for approximately 13 years, it is not well known within the accounting profession, not by academics or public or private practitioners. While the majority of those within the accounting profession will not audit federal entities or need a working knowledge of FASAB standards, all should be at least generally familiar with any organization having the authority to promulgate GAAP.
After the AICPA Council recognized FASAB, the AICPA’s Auditing Standards Board issued SAS 91, Federal GAAP Hierarchy. This standard formally establishes the FASAB pronouncements within the auditing standards structure. SAS 91 is actually an amendment to SAS 69, in effect since 1992, which explains the meaning of the phrase “present fairly,” and describes the sources of accounting principles in the United States. SAS 69 also provides a hierarchy of acceptable sources for nongovernmental entities and state and local governmental entities. SAS 91 closes the loop by establishing a hierarchy of accounting principles for federal governmental entities.
The hierarchy that SAS 91 establishes for FASAB is similar to that previously established for FASB and GASB. SAS 91 provides four categories of accounting principles, labeled from highest (a) to lowest (d).
Regarding categories b and c, auditors can generally assume that, unless otherwise stated, relevant AICPA statements and Practice Bulletins have FASAB clearance.
Similar to FASB and GASB accounting principles, the standard also indicates that, in the absence of a pronouncement covered by Rule 203 or another source of established accounting principles, the auditor of a federal governmental entity may consider other relevant accounting literature. SAS 91 includes a list of examples of such accounting literature.
With the implementation of SAS 91, we now have a comparable hierarchy across the three types of standard-setting bodies. For example, category a for nongovernmental entities, state and local governmental entities, and federal governmental entities, consists of FASB Statements and Interpretations, GASB Statements and Interpretations, and FASAB Statements and Interpretations, respectively, along with applicable AICPA and FASB pronouncements.
FASAB’s Source of Authority
Over the years, accounting systems for federal agencies have not been the models that most accountants would choose to follow. The emphasis has been on accounting for budgetary expenditures, not financial performance. Prior to FASAB, federal agencies used a number of different accounting methods, which resulted in inconsistencies throughout the government. The legislative requirements for financial reporting were not always clear.
As early as 1950, Congress assigned the Comptroller General of the United States the responsibility of prescribing accounting principles to be used by executive agencies in developing their accounting systems. The Comptroller General heads the U.S. General Accounting Office (GAO), a Congressional agency. But the executive branch has never acknowledged that the Comptroller General has the constitutional authority to set accounting standards for the executive branch. Congress also mandated that the Director of the Office of Management and Budget (OMB), an executive agency, prepare and submit to Congress a financial management status report and a five-year financial management plan. In 1990 Congress passed the Chief Financial Officers Act, which assigned to the Director of OMB significant responsibilities for establishing policies and procedures for approving and publishing accounting principles and standards for federal agencies. In effect, Congress legislated joint responsibility for federal accounting standards development. Furthermore, the Secretary of the Treasury, as the cabinet member that oversees collection and disbursement of all federal monies, has a legislative mandate to prepare reports to inform the President, the Congress, and the public on the financial operations and condition of the government. With so many different sources of authority, it’s little wonder that federal financial reporting has left much to be desired.
Based on the joint responsibility for financial reporting among the GAO, the OMB, and the Treasury Department, Congress ultimately legislated that the Comptroller General, the Treasury Secretary, and the President (through OMB) conduct a continuous program for improving accounting and financial reporting in the government. This legislation led to the establishment of the Joint Financial Management Improvement Program (JFMIP). The JFMIP designated the Secretary of the Treasury, the Director of OMB, and the Comptroller General as “principals” for the improvement of the government’s financial management.
In October 1990, the General Accounting Office, the Treasury Department, and the Office of Management and Budget agreed to a memorandum of understanding that established the FASAB. The memorandum outlined the composition of FASAB and the processes under which it would set standards. The three JFMIP principals came to be known as FASAB’s sponsors.
An important point to note is that FASAB serves strictly an advisory role to the sponsors. Any standards it develops must be approved by each of the three sponsors. In effect, each sponsor holds veto power. If the sponsors do not object to a proposed standard, then it becomes a requirement for federal agency reporting, and official GAAP.
FASAB is composed of nine members who serve two-year terms and can be reappointed for two additional terms. Six members are from the following federal agencies:
The GAO, OMB, Treasury, and CBO members are selected by their respective
agencies. The other two federal members are selected by the three sponsors.
The other three board members are nonfederal members selected by the three sponsors from the general financial community, the accounting and auditing community, and academia. Their selection is based on recommendations from a panel convened by the FASAB chair. The sponsors select the Board chairperson from among the three nonfederal members.
The nonfederal positions are part-time positions. The Chairman is compensated at half of an executive-level salary. The other two nonfederal members are paid at an hourly rate for attendance at Board meetings, with an equivalent amount of time for preparation. For these members total time averages approximately 200 hours a year.
With one major exception, the FASAB standards-setting process is similar to that of the GASB. Issues are identified and an agenda is established based on suggestions and requests from interested parties. Preliminary deliberations are then begun. Task forces and research projects define the nature and scope of the problem, identify additional research necessary, and prepare the initial documents. Public hearings are conducted, comments are analyzed, and preliminary decisions are published in an exposure draft. This is followed by an additional public comment period, further consideration of comments received, and usually a final decision.
The main difference between the FASAB and GASB standards-setting processes is that FASAB is an advisory board and its recommendations are subject to veto by any one of its sponsors. In this respect it is not totally independent, whereas GASB’s final decisions are not subject to veto by any outside authority. FASAB’s independence problem created concerns from the AICPA in deciding whether to give it Rule 203 status.
Before the AICPA Council designated FASAB as the accounting standards-setting body for federal government entities, it formed the Task Force on Rule 203 Criteria to assist in determining appropriate criteria for authorizing bodies to establish GAAP. The Task Force on Rule 203 Criteria was chaired by Gary Previts, a former member of the AICPA Board of Directors, and consisted of members drawn from the AICPA, government, and industry. In May 1999, the AICPA Council approved the proposed criteria of independence, due process and standards, domain and authority, human and financial resources, and comprehensiveness and consistency. In October 1999, the task force concluded that FASAB satisfied the criteria, and the AICPA Council concurred. It grandfathered the standards already issued by FASAB since March 1993, and required a continuous improvement review of the FASAB’s mission and structure within five years. The requirement for future review was due in part to concern for potential independence problems related to the ability of the original FASAB sponsors to veto FASAB recommendations.
FASAB provides four primary levels of guidance: concepts, standards, interpretations, and technical releases. The concepts explain the objectives and ideas used to develop GAAP principles. They are intended to provide guidance when applying the standards. To date, FASAB has published four Statements of Federal Financial Accounting Concepts. They address the objectives of federal financial reporting, the identification of the reporting entity, and issues related to the preparation of management’s discussion and analysis of the financial statements.
The standards determine GAAP for federal entities. FASAB has published 24 Statements of Federal Financial Accounting Standards. They cover major topics, including: reporting for assets (such as loans, inventory, software, property, plant and equipment, and stewardship land); reporting for liabilities (including contingent liabilities and social insurance); revenue recognition; cost accounting; and management’s discussion and analysis of the financial statements.
Interpretations and technical releases tend to address agency-specific issues or provide additional implementation guidance in specific areas. Six interpretations have been published; the topics include Indian trust funds, Treasury Judgement Fund transactions, pension and retirement health-care issues, and nonexchange revenue. Five technical releases have been issued by FASAB’s Accounting and Auditing Policy Committee (AAPC) to provide additional guidance regarding audit legal letters, environmental liabilities, estimates for direct and guaranteed loans, seized and forfeited property, and internal use software.
Importance of GAAP Status to GAO
The Chief Financial Officers Act of 1990 required the preparation and audit of organizational financial statements by selected departments and agencies. Subsequently, the Government Management Reform Act of 1994 mandated audited financial statements for the 24 largest agencies and for the government as a whole, beginning with fiscal year 1997. GAO has the overall responsibility for the audit of the entire federal government, and consequently is most concerned that agencies properly apply FASAB standards. When the FASAB was seeking Rule 203 recognition, the Comptroller General said, “It is important to have that—it is like the Good Housekeeping Seal of Approval and it’s language that communicates outside the Beltway. …. If we do [get the designation], it will be a big win in the area of fundamental management and accountability.” The GAAP designation provides credibility to the FASAB standards that the agencies are required to follow and makes the GAO audit reports on these statements more meaningful.
The financial statements and the GAO’s audit report are issued annually as the “Financial Report of the United States Government.” These reports have been issued six times, for fiscal years 1997 through 2002. Agencies are allowed to use their inspectors general or independent CPAs for their agency audits. The GAO will often rely on these individual agency audits when performing its audit of the entire government. Some agencies have done an exemplary job of accounting and financial management and have received unqualified reports. The number of agencies receiving unqualified opinions has increased from six to 24. Unfortunately, major problems still exist for the government as a whole: The GAO has issued a disclaimer of opinion in each of the six audits because it was unable to determine the reliability of significant portions of the financial statements.
Significance of FASAB Pronouncements
The AICPA’s recognition of FASAB as the source of GAAP for federal governmental entities has two implications for CPAs. First, CPAs should express an opinion regarding whether the financial statements were prepared in conformity with GAAP, versus another comprehensive basis of accounting (OCBOA). This requires that CPAs who audit federal entities understand how to apply FASAB standards. A list of all FASAB publications is available at www.fasab.gov.
Second, if the financial statements are not prepared in conformity with FASAB standards, then CPAs should generally not issue an unqualified opinion on them. According to the FASB staff (with the assent of the board), any federal entities that have previously issued their financial statements in conformance with FASB standards may continue to do so and will be regarded as in conformance with FASAB standards.
International Accounting Standards Board (IASB)
The London-based IASB replaced the International Accounting Standards Committee on April 1, 2001. Its primary goal is to bring about convergence in accounting standards throughout the world. It is committed to developing a single set of high-quality global accounting standards that require transparent and comparable general-purpose financial statements. To accomplish its goals, the IASB actively works with national accounting standards setters. Currently, Australia and New Zealand, Canada, France, Germany, Japan, the United Kingdom, and the United States have an IASB member resident in their jurisdiction. In addition, many other countries follow IASB standards. The IASB has sole responsibility for setting International Financial Reporting Standards (IFRS).
The IASB has 12 full-time and two part-time members. Members are drawn from various backgrounds and represent auditor, preparer, user, academic, and other constituencies. The IASB develops accounting standards in an open environment, using due process to gain input and the support of interested parties. It may work in whatever way it considers most effective and cost-efficient, but generally operates consistent with the processes used by national standards-setting organizations.
The IASB provides financial reporting guidance on three levels. Conceptual guidance is provided by the IASB Framework for the Preparation and Presentation of Financial Statements. Specific guidance is offered by the new IFRSs and existing International Accounting Standards (IAS). Additional guidance regarding troublesome issues is provided in the form of Interpretations of IAS by the International Financial Reporting Interpretations Committee (IFRIC) and SIC Interpretations by the former Standing Interpretation Committee (SIC).
There are currently 41 IASs, originally issued by the IASC, some subsequently amended by the IASB. The topics covered are similar to those addressed by FASB. Balance sheet items addressed include: inventories; property, plant, and equipment; capital leases; investments; interests in joint ventures; financial instruments; intangible assets; employee benefit obligations; and contingent assets and liabilities. Income statement topics addressed include: revenue recognition; impairment; earnings per share; discontinued operations; and income taxes. Industry-specific standards address construction contracts, financial institutions, and agriculture. Other topics covered include: interim reporting; segment reporting; business combinations; related-party disclosures; inflation; and changing exchange rates.
Current projects include improving existing IFRSs, reporting business combinations, share-based payments, and insurance contracts.
IASB and FASB Convergence Project
U.S. business has become increasingly global in nature. The growth of corporations beyond national borders has been financed with internal resources, debt, and stock. Corporations wishing to issue debt or equity securities in a given country are typically subject to its financial reporting standards and legal requirements. For Example, foreign companies that wish to issue stock on the New York Stock Exchange are subject to SEC reporting requirements and are generally expected to follow, or reconcile their financial reporting to, U.S. GAAP. U.S. corporations face similar requirements overseas. The need to prepare different financial statements for different countries results in additional expense and in many cases, a lack of comparability.
With the development of the European Union (EU), NAFTA, and other international trading agreements, divergent national standards are being replaced by a spirit of cooperation. In summer 2002, the EU adopted IASs and IFRS, effectively recognizing the IASB as a leading accounting standards-setting body. The standards will be required for most publicly traded companies by January 1, 2005. Companies that use U.S. GAAP and are currently publicly traded in the U.S., as well as companies that have issued debt but not equity instruments, will be required to comply by January 1, 2007.
On a similar note, in October 2002 FASB and the IASB jointly announced a memorandum of understanding (the Norwalk Agreement) to acknowledge their commitment to the development of high-quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. Both groups pledged to use their best efforts to make existing standards compatible as soon as possible, and to coordinate future projects to ensure that compatibility is maintained. Initial steps are already being taken: Both standards-setting bodies have added short-term convergence projects to their agendas.
The short-term convergence project is intended to reduce differences between IASs and U.S. GAAP. The IASB will deliberate the following issues: the classification of refinanced liabilities; liabilities under which the borrowing agreement has been breached; the exchange of similar assets; the method of reporting the effects of voluntary changes in accounting policies; and the treatment of financial instruments. Other areas where reporting differences are expected to be reduced include: discontinued activities; costs associated with the exit or disposal of a business; government grants; idle capacity and spoilage; depreciation on idle assets and assets held for disposal; income taxes; construction contracts; inflation accounting; joint ventures; interim financial reporting; and discontinued operations.
The Future of Financial Reporting
FASAB standards for federal agencies now have the same level of acceptance as those of FASB and GASB for nongovernmental and local and state governmental entities. Because of its new stature, FASAB is an important organization to anyone with interest in the accounting profession, especially auditors of federal entities.
FASB’s convergence project with the IASB is probably just the first step toward global standards. With an ever-increasing number of clients with global operations, CPAs need to be informed about international accounting standards and how they affect the evolving standards-setting process.
©2006 The CPA Journal. Legal Notices
Visit the new cpajournal.com.